DECOMMISSIONING OFFSHORE INSTALLATIONS IN THE OIL AND GAS INDUSTRY
DECOMMISSIONING OFFSHORE INSTALLATIONS IN THE OIL AND GAS INDUSTRY
Decommissioning is an integral part of the oil and gas industry operations, where the offshore assets and facilities need to be removed, reused if possible or recycled when they reach the end of their operating life. (Alternative use of the infrastructure may also be evaluated)
From a practical perspective, a significant number of installations worldwide are reaching the end of their design life, and while there are some ways to expand their lifecycle (an expensive process by itself), there comes a point where these structures must be decommissioned. These infrastructures include: wells, pipelines, topside installations and subsea infrastructures. However, operators are faced with a number of challenges in this regard, namely: some older structures that are not initially designed for decommissioning,
missing or incomplete design plans and records, accumulations of contaminants and other unexpected problems. Moreover, all necessary measures need to be taken to ensure that decommissioning is executed in a manner which is as safe, environmentally sound and cost-effective as possible.
Decommissioning is thus a very complex and significant subject in terms of its economic impact on the oil and gas industry whose main concerns are to maximize the lifecycle of offshore infrastructures and minimize the costs of decommissioning while complying with the relevant rules and regulations.
The present chapter examines the main approaches to reducing the cost of decommissioning (Section 2) and to ensuring compliance with rules and regulation (Section 3), with the UK legal framework as a main example. The final section provides an overview of decommissioning regulations under Lebanese Law (Section 4).
Reducing decommissioning costs
Cost reduction when it comes to decommissioning is mainly achieved through operational efficiency and technological innovation (2.1) on one hand, and by means of fiscal incentives (2.2) on the other hand.
Reducing decommissioning costs: Efficiency, innovation and technology
Decreasing production levels and rising operational costs present major challenges to the industry. Facing these challenges requires collaboration and innovation within the industry. Innovation in technology, research and development is by itself also a costly operation which requires collaboration between all concerned parties to share costs through investing and encouraging third parties to invest in new technologies.
The process of decommissioning oil and gas facilities is certainly a lengthy, complex and expensive process, which includes sophisticated management, planning, coordination, resources, technology, safety, etc. Decommissioning UK North Sea oil and gas facilities for instance is projected to cost between 35 and 40 billion Pounds over the next three decades. Around 500 facilities are expected to reach the end of their operational life, although the exact costs are hard to predict due to many unforeseen factors.
Reduction of cost implies improving operation efficiency, the ability to implement the organizational change necessary to improve efficiency, exploring new technologies and new concepts and ideas. In this regard, the Oil and Gas Authority in the UK (OGA) published a decommissioning strategy setting the following priorities:
- Cost certainty and reduction in a technically competent, safe and environmentally responsible manner.
- Decommissioning delivery capability in terms of supply chain expertise and capacity, effectively supported by appropriate business models, contracting arrangements and industry alignment.
- Decommissioning scope, guidance, and stakeholder engagement by working with the Department of Energy and Climate Change (DECC) and other relevant parties to identify and evaluate opportunities to optimize and define parameters for decommissioning scope and to improve industry engagement with the organizations that regulate the decommissioning process.
- Tripartite work (government, industry and OGA) – The role of the MER UK Forum and the role of the MER UK Decommissioning Board.
- OGA specific work – The role of the OGA in decommissioning, including decision quality, improved cost estimating, and appropriate interface, stakeholder and communication management.
Reducing decommissioning costs: Tax incentives
Tax incentives are also universally considered as an important tool for reducing decommissioning costs. Governments use the taxation regime to insure returns from Oil and Gas exploitation by the private sector. This same tax regime could be also used to provide incentives in the form of tax reductions for the decommissioning of Oil and Gas platforms to mitigate the high costs of this operation and its financing. Thus, the cost of decommissioning is practically shared between the public and private sectors,
such as in the UK with the introduction of decommissioning relief deeds.
As shown above, governments are seeking to ensure the most optimal frameworks for cost reduction of decommissioning operations. In return, operators are required to comply with the rules and regulations for environmental protection (3.1) and with international best practices in the field of offshore decommissioning (3.2).
Ensuring compliance: The Environment
The impact on the environment needs to be taken into account in the regulation of decommissioning activities, particularly the impact on marine life, the fishing industry, pollution, etc. Effects on marine life for instance include: sound disturbance (whales and dolphins particularly affected), displacement, survival, auditory impairment, disrupting the habitat and damage to artificial and natural reefs.
Most legislations around the globe include the principal obligation of “returning the seabed to its original state and condition” as a basic concept, while the USA, UK and Norway have more clear and defined rules and regulations for subsea decommissioning.
In the UK, complete removal of installations is governed by the 1998 Petroleum Act and is in line with OSPAR Decision 98/3 which prohibits the dumping and leaving in place of disused offshore installations within the OSPAR maritime area. However, governments may allow for certain exemptions in specific cases.
Actual data and research are still needed on the marine life present around the particular site being decommissioned in order to determine the right approach and mitigate any possible damage arising from the complete removal of underwater structures. Indeed, some experts believe that leaving wellheads, subsea installations and pipelines in place after draining and flushing hydrocarbons is less damaging to the environment and more cost effective. For instance, when Decommissioning pipelines in oil and gas fields, some buried pipelines that do not present a hazard to the sea may be left undisturbed. In fact, pulling them up could cause more harm than benefit to the sea bed. However, national and international regulations are yet to revise their provisions and adopt these new environmental theories.
Ensuring compliance: Best Practices
A quantitative online survey was conducted by Endeavor Management in July 2014. The survey showed that the best practices for decommissioning are:
- Establishing an internal subsea decommissioning team to cover all the disciplines that are required.
- Planning extensively in advance and establish contingency plans.
- Conducting an in-depth survey of existing subsea facilities.
- Defining the vessels to execute this process: Define requirements for the vessels that will be removing subsea items from the seafloor.
- Ensuring all support vehicles are available.
- Confirming hydrocarbon capture methods and disposal process for all subsea hardware.
The survey came to the following conclusions:
- Subsea decommissioning is a major concern area for the industry in the near future.
- Costs for subsea decommissioning are hard to estimate and have a negative impact on operator economics.
- Plug and abandonment (P&A) costs are a significant portion of overall subsea decommissioning costs that could be in some cases mitigated by leaving trees and tubing in place.
- The industry recognizes the benefit of sharing information and finding ways to lower costs.
Lebanese Law – Case study on one of the most recent Oil and Gas legal frameworks
The Lebanese legal framework for oil and gas is based on three main instruments: the Offshore Petroleum Resources Law 2010 (OPRL), the Petroleum Activities Regulations for Lebanon (PAR), and the Terms of Reference and Exploration and Production Agreement for Petroleum Activities (EPA). Below is an overview of the main stipulations governing the general framework of petroleum activities in Lebanon (4.1); the cessation and decommissioning plan (4.2); environmental protection and the obligation of prudence (4.3); the decommissioning account (4.4); and liability of Rights Holders in relation to decommissioning activities (4.5). We conclude this section with a final analysis of the Lebanese legal framework on decommissioning in the oil and gas sector (4.6).
Petroleum activities in Lebanon: general framework
OPRL Article 1 defines Petroleum Activities as “the planning, preparation, installation and execution of activities associated with a subsea reservoir, such as reconnaissance, exploration, production and exploitation, laying pipelines, development of facilities, production from reservoirs, transportation, as well as cessation of any such activities and decommissioning of a Facility”.
These activities are conducted on the basis of an Exploration and Production Agreement (EPA) between the State and the Right Holders which shall include “standard minimum guarantees covering the minimum work obligations, for the approval of the Plan for Development and Production, and for cessation of petroleum activities and decommissioning of a Facility.”
An independent Petroleum Administration handles the oversight of petroleum activities and the evaluation of plans for development, transportation and cessation of petroleum activities and decommissioning of facilities.
Plan for cessation of activities and decommissioning
Production or cessation of petroleum activities and decommissioning of facilities shall not be undertaken, nor construction work be started, until the plan for Development and Production has been approved by The Council of Ministers. Such provisions are not specific to Lebanese Law; they are also found in other legislations such as the UK Petroleum Act 1998 updated by the Energy Act 2008, which requires that the concerned parties submit an abandonment (i.e. decommissioning) program.
Chapter seven of the OPRL regulates the subject matter under the title of “Decommissioning” in articles 46 to 49. It stipulates that the plan for cessation of Petroleum Activities and Decommissioning shall be presented to the Minister of Energy and Water “at the earliest three years and not later than one year prior to expiry of an EPA or Petroleum License pursuant to [the OPRL] or the planned surrender of a Petroleum Right or termination of the use of a Facility and its appurtenant equipment”, and shall be subject to the approval of the Minister based on the opinion of the Petroleum Administration. It shall include “alternative decommissioning solutions including an evaluation of the possibility of continued Petroleum Activities or use of a Facility, and Right Holder’s recommended solution.” Environmental impact assessment studies and economic aspects of the alternative solutions constitute also an integral part of the said planning.
Chapter Five of the PAR complements these provisions with further procedural regulations and adds the duty to prepare the decommissioning plan “in consultation with the Petroleum Administration and in compliance with the Offshore Petroleum Resources Law.”
Protection of the Environment and the obligation of prudence
Petroleum activities, including decommissioning, are subject to the Lebanese laws for the protection of the environment, and the Ministry of Environment, in coordination with the Minister of Energy and Water, “shall be in charge of supervising and controlling environmental matters related to Petroleum Activities and shall coordinate with other concerned authorities, take initiatives or measures deemed necessary to minimize negative impact that Petroleum Activities may have on local communities and the environment.”
These activities are also to be conducted “in a responsible and prudent manner in accordance with this law and shall include practices and methods that reasonably would be expected from internationally experienced Operators that take due account of safety of personnel, the protection of the environment and the economic value of Petroleum resources, Facilities, vessels, vehicles or other equipment.” The PAR specifies that the decommissioning plan shall indeed “ensure that cessation and decommissioning is conducted in a manner which, when applicable, will give effect to standards and procedures generally recognised as prudent in the international Petroleum industry and the Right Holders’ standards for cessation and decommissioning.” Similarly, in case of relinquishment of acreage or surrender, revocation or when an EPA expires without any Facilities being developed or used, then no decommissioning plan is required, but the cessation of activities is to be conducted in accordance with applicable laws and, when applicable, good Petroleum industry practice, and the Right Holder is required to take all necessary actions to prevent hazards the environment.
This obligation of prudence is reiterated in the EPA, Article 18(1) of which stipulates that the Right Holders shall ensure that cessation and decommissioning are conducted “prudently in accordance with Best International Petroleum Industry Standards and, to the extent consistent with the foregoing, the Operator’s standards for cessation and decommissioning based on its past practice.” Article 2 of the EPA defines “Best International Petroleum Industry Standards” as follows:
“All those uses and practices that are, at the time in question, generally accepted in the international petroleum industry as being good, safe, economical, environmentally sound and efficient in exploring for, developing, producing, processing and transporting Petroleum. They should reflect standards of service and technology that are appropriate to the operations in question (including state-of-the-art standards where appropriate and economically justified) and should be applied using standards in all matters that are no less rigorous than those in use by the Right Holders or their Affiliates in other global operations.”
As per the PAR, the Operator is required to establish an interest-bearing escrow account on behalf of the Right Holders. This account is designed to cover the total costs of implementing the decommissioning plan. The Right Holders are required to submit to the Minister of Energy and Water the estimated future decommissioning costs for their preferred decommissioning alternative and the other alternative decommissioning solutions. Based on the recommendation of the Petroleum Administration, the Minister selects among the submitted alternatives a preliminary decommissioning solution to form the basis for the calculation of the estimated decommissioning costs to be covered by the decommissioning account. Right Holders are required to make quarterly payments to the decommissioning account proportionate to their respective “participating interest”, calculated on the basis of the estimated cost for implementation of the cessation and decommissioning plan.
As per Law for the Tax Provisions related to Petroleum Activities, the costs of the escrow account
are included in the calculation of deductible expenses.”
Liability Related to Decommissioning
As per Article 49(4) OPRL, any person responsible for the implementation of an approved cessation and decommissioning plan is liable for damage caused to third parties. Article 67 PAR further stipulates that the Right Holder and the owner of a Facility are liable for any direct loss or damage resulting from the implementation of said plan, and that liable parties are “jointly and severally liable for the damage, loss or financial obligations.”
Article 30 of the EPA contains the detailed terms of indemnification and liability, which include that the obligation for Right Holders to “indemnify and hold the State harmless (…) from claims, actions, demands and proceedings made against the State by third parties in respect of injury, loss or damage resulting from (…) Petroleum Activities that is in material breach of the EPA or Lebanese law or amounts to Gross Negligence or Wilful Misconduct.”
Analysis of the Lebanese legal framework on decommissioning
Lebanese regulations do not impose upon right holders and operators an obligation of returning the seabed to its original state and condition. With this in mind, the main obligation of prudence, pegged on international best practices in the field, may be the right approach to ensure the most appropriate and environmentally sound measures are taken in view of up-to-date scientific evidence and international practices in the field, especially in the midst of a growing international debate around the need or lack thereof for complete removal of installations after cessation of petroleum activities.
This approach also allows for certain flexibility when it comes to cost reduction and adjustment over time, taking into consideration economic and technological developments. The Lebanese legislator has allocated detailed provisions to the economic aspect of petroleum activities in general and decommissioning in particular. The cessation and decommissioning plan must include, in addition to the environmental impact assessment, the detailed costs of alternative decommissioning solutions, and a tax-deductible decommissioning account is established to cover the costs of decommissioning. Finally, Lebanese petroleum regulations do not include any criminal liability for damages resulting from decommissioning or any other petroleum activities; damages resulting from decommissioning activities only result in indemnification.
However, the Environmental Protection law number 444 dated 29 July 2002 does impose criminal sanctions on the violation of the Environmental impact assessment studies during the execution of any project whenever these studies are required and have been approved by the relevant authorities.
Lebanese regulations generally seem to strike a good balance between the economic and environmental aspects of decommissioning. Although the legal framework as presented above seems more detailed when it comes to the “economic” than to the environmental regulation of decommissioning, its provisions remain relatively general on all fronts. This lack of detailed provisions in the oil and gas sector, although it allows for a much needed flexibility in a constantly evolving economic and scientific context, could also be reason for concern and might raise issues of transparency and predictability of the legal framework and give way to disputes arising from differences of interpretation between the State and Right Holders, especially in a country like Lebanon which is still struggling to achieve transparency and rule of law in public governance. However, given that these are recent legislations and that offshore exploration has only started in May 2018, we are yet to observe the practice and case law in the next few years for more insight into the implications of these laws and regulations.
As demonstrated in this paper, it is important to give careful thought to how matters relating to the negative impact on the environment caused by major industrial activities such as mining, nuclear operations and oil and gas operations are regulated particularly upon cessation of activities. We have seen that managing decommissioning in these three sectors starts with providing for the regulatory framework and determining whether this will be undertaken through domestic regulations or international instruments.
We have seen that decommissioning, across the three sectors, though undertaken during the last stage in the lifetime of a facility, begins at the planning stage when a facility is being designed and applications for permits and licenses are being made. In fact, in most jurisdictions, commencement of operations for both a mining operation and a nuclear facility is premised on submission of a satisfactory decommissioning plan. The main common feature in the three industries indicates that the plan covers feasibility of decommission strategy and provides financial assurance for conducting the actual decommissioning. These requirements are achieved through a robust body of decommissioning laws and regulations. However, to ensure that these regulations or laws are complied with there is need for clarity on final responsibility on the part of the governing regulatory body.
In conclusion decommissioning across all three sectors whether pertaining to oil and gas facilities, nuclear power plants or mining structures is a very complex technical, regulatory and administrative process. Although each sector has its own specific legal, economic, environmental and technical particularities, they all share common general characteristics and essential elements such as; formulating a solid decommissioning and environmental impact assessment plan, developing common universal environmental standards, guidelines and best practices, financing and cost reduction.
Additionally, we have also seen that the key to a successful future in Decommissioning is finding the right balance between environmental considerations and the financial implications on the operators.
Cost reduction, efficiency, new breakthroughs in technology, clear comprehensive regulations, tax reductions, environmental safeguarding and protection, and implementing best practices will certainly require the industry and the regulators to combine their efforts and recognize that Decommissioning is first and foremost a collaborative effort between regulators, operators and the entire Oil and Gas supply chain.
Finally, as the first and foremost general objective in decommissioning across all three sectors is protecting and preserving the environment, the need for close collaboration between the industry and regulators to establish an international organization for the oil and gas and mining sectors is much needed to achieve this aim drawing from the positive role and impact that the International Atomic Energy Agency achieved in the nuclear sector.
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