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LEGAL & FINANCE
Decommissioning planning in the energy transition: key considerations Achieving the UK Government's target to be net-zero by 2050 will require a collaborative approach from stakeholders right across the energy industry. With increasing political and social pressures on the oil and gas sector and in light of the revised OGA Strategy, heritage oil and gas companies are recalibrating their business strategies to reduce their carbon footprint, attract investment and position themselves as viable energy companies of our time. A significant aspect of this exercise is assessing whether to diversify operations and the product mix and pursue new energy projects. Put simply, do they decommission or diversify? The outcome will depend on a variety of factors including technical suitability but also the wider legal and commercial issues such as the level of current decommissioning liability.
context of energy transition. Assessment of decommissioning liability of individual assets, together with a review of section 29 notices, decommissioning security agreements (DSAs) and any financial security currently posted under those arrangements will help build the picture of the financial implications of decommissioning compared to diversification.
Decommission or diversify?
Decommissioning – the key legal issues
The OGA Strategy places a "supporting" obligation on infrastructure owners considering decommissioning to ensure that "all viable options" for the re-use or re-purposing of such infrastructure (including carbon capture and storage) have been "suitably explored".
The legal framework associated with the decommissioning of offshore oil and gas infrastructure has two main strands: the contractual and the regulatory. Within the bounds of freedom of contract, parties can agree terms suitable to their co-venture arrangement. Most commonly, this takes the form of a DSA which should be regularly reviewed in conjunction with the anticipated life of an asset. This will allow for sound financial and possible energy transition planning.
From a technical perspective this may include assessing the size and location of wells and pipelines and the proximity of infrastructure to other offshore ‘hubs’. Commercially, consideration must be given to whether there will be realistic return on the investment required for diversification or if the costs of decommissioning offer a more cost-effective approach. In making these decisions companies need to consider their entire asset portfolio in the
From a regulatory perspective, section 29 notices will play a crucial element in assessing decommissioning liability. The notices should be frequently reviewed, and any updates or changes required should be notified to BEIS OPRED.
The importance of strong boards in delivering net-zero and driving investor confidence In the last of our three articles, we focus on the G of ESG. The COVID-19 pandemic, COP 26, the UK Government’s Net-Zero Strategy, investor sentiment and societal pressure have demonstrated the need for more comprehensive ESG reporting, clear net-zero strategies, and energy transition plans. To meet 2050 targets, ESG accountability must extend to the boardroom, with factors such as growth strategy and, potentially, executive renumeration being aligned to ensure good ESG reporting and performance.
This new obligation requires the application of good and proper governance and underlines the importance to the OGA that companies have proper governance arrangements in place regardless of whether they are publicly or privately-owned. Governance is an important enabler of long-term corporate value and the OGA, working with the UK’s corporate governance regulators, seeks to ensure continued investment in the UKCS.
Boards need to re-think every part of their business; redesigning and redefining their strategy and operational processes to meet the needs and expectations of the market and society alike to support long-term value creation.
There are currently a broad set of challenges facing the oil and gas industry: rattled investors, political uncertainty, societal pressure, financial institutions pressurised by NGOs to name but a few. Public trust, investor confidence and active and open engagement around net-zero are all critical to driving and delivering the energy transition, whilst securing energy supplies for the UK.
This, and the changing corporate mix on the UK Continental Shelf (UKCS), seeing new players entering and bringing capital for exploration, development, redevelopment, and energy transition projects, has resulted in a new obligation being placed on licensees in the OGA’s Strategy.
www.ogv.energy I January 2022
To achieve this will require sound governance principles and practices, transparency, and accountability on ESG, and clear communication
Energy transition Given that section 29 notices are inherently linked to hydrocarbon operations, the regulatory position in relation to infrastructure which has changed hands and been re-used for new energy (nonhydrocarbon) operations is currently unclear. For example, in a scenario where a piece of infrastructure previously used for oil and gas is sold and re-purposed for hydrogen use, will the 'new' owners of such infrastructure be within the remit of the Petroleum Act and receive a s.29 notice? If new energy projects are going to increase at pace, stakeholders require certainty of the legal position. In conclusion, decommissioning planning is more important than ever. Against the backdrop of continued energy demand, a changing mix of participants in the North Sea and calls for energy transition to happen at pace, oil and gas companies should get a handle on their decommissioning liability now (both from a contractual and regulatory perspective). This will allow them to assess their financial position, identify targets and opportunities and position themselves at the centre of energy transition.
ESG of actions. Any perceived lack of authenticity in driving the energy transition or in maintaining good governance will only add to the industry’s pressures and the OGA, as the sector’s expert regulator, intends to ensure the application of appropriate governance in meeting UKCS license obligations. At the heart of that, the OGA will publish its Governance Guidance early in 2022. We hope, in delivering that guidance, that good governance practices at all company levels will be upheld, trust re-established, and the ever-diminishing pool of capital available to the sector safeguarded. The OGA will use its role as regulator to support and influence industry and, where appropriate, will exercise its regulatory powers to influence action.
