BEIS issues draft guidance on assessing financial capability of oil and gas companies to deliver decommissioning obligations

United Kingdom

BEIS-OPRED, the part of BEIS responsible for regulation of decommissioning of offshore oil and gas installations and pipelines, issued new guidelines in May last year on decommissioning – see our Law-Now here. Final guidance on the Environmental Considerations for Decommissioning (Section 12) was incorporated into the guidance notes in a new version issued in November.

At that time, guidance on assessment of financial capability was omitted from the guidelines while BEIS-OPRED considered its policy. Draft guidance has now been issued for consultation. The new guidance does not differ substantially from previous guidance (for instance in the Guidelines of 2011), but does contain a few interesting comments.

The prime concern of BEIS-OPRED in this guidance is to ensure that the taxpayer is not exposed to undue risk from companies defaulting on their obligations leaving government and the taxpayer with decommissioning responsibilities. In order to assess this risk, OPRED will review the Net Worth of both individual companies and groups of co-venturers on a field by field basis in comparison with OPRED’s estimate of their respective decommissioning obligations. OPRED will also consider any other UKCS decommissioning liability of the company and also each corporate group’s Net Worth in comparison with the group’s decommissioning obligations. This analysis is done at the time a Field Development Plan is approved, every 3-4 months thereafter and if there is an event regarding the licence such as a sale and purchase, or if there is information from media or other sources suggesting that there has been a detrimental change in the situation of the company or the field.

Where this review suggests that the decommissioning costs are less than 50% of the Net Worth of the individual company, the company is considered low risk. Between 50% and 70% the company is considered medium risk. If there is a low risk company in the field group (or historic owner who remains subject to a section 29 notice for the field) then the group is likely to be considered low risk. If all companies in the field group are medium risk, but there is a wide spread of ownership then BEIS is unlikely to take further action. However, for companies and groups where the ratio is above 70%, a company is considered high risk and a more in depth analysis may be undertaken including looking at the net present value of fields, the strength of co-venturers/previous owners in each field, the company business plan, what financial arrangements are in place to meet decommissioning costs and capital expenditure commitments. If appropriate, BEIS may take risk mitigation steps such as making a parent or affiliate subject to a section 29 notice or asking for security.

This is a broadly similar approach to that set out in the previous guidelines – comments which may be of interest to readers are however:

  • In relation to the withdrawal of section 29 notices after sale, the guidance notes that “in the vast majority of cases the section 29 notice is unlikely to be withdrawn from the selling party/parties”. This acknowledges anecdotal experience that withdrawals of section 29 notices are much less frequent than in the past.
  • The guidance expressly acknowledges that where new fields are developed by companies with limited financial resources OPRED may be concerned about their ability to decommission if something should go wrong in the early phase of development. Therefore, it may require associated parties to be on section 29 or for the owners to give security to cover this phase, which could then be suspended after an agreed period of production if satisfactory field performance has been demonstrated, and reinstated only towards the end of field life.
  • Where a company is not registered in the UK, it may be discounted when considering group classification for risk purposes, presumably on the basis that BEIS would not wish to proceed against a company in overseas courts to recover decommissioning costs.
  • Annex 1 sets out OPRED’s requirements for decommissioning security. It acknowledges that where a company has a Decommissioning Relief Deed (DRD) and appropriate tax history, and can therefore be guaranteed a certain level of tax relief, OPRED will accept post-tax security – this practice is slightly different from that in field DSAs where it is the recipient of security which will generally need a DRD before accepting post-tax security. The difference arises since OPRED is focusing on the ability of the party to do its own decommissioning and in a field DSA each party is concerned about the situation where it is forced to carry out decommissioning due to the default of its co-venturer and what tax relief it will be able to rely on in that situation.
  • As announced in 2018, OPRED will now accept security from A-/A3 rated institutions but continues to reject PCGs as a form of security.Bonds from insurers are expressly mentioned as an acceptable form, cementing the acceptance of these instruments as an alternative to the traditional LOC.
  • The acceptable risk factor is stated to be around 10-30% - this is again a reflection of current industry practice.

Comment

There had been concern that OPRED might move to a more mandatory approach to DSAs across the board - the industry will be relieved to see that the approach continues to be based on appropriate risk-assessment.