Book Reviews

Decommissioning of Oil and Gas Installations: A Comparative Approach to the Legal and Contractual Issues, by Professor Peter Cameron, CEPMLP, study carried out for the Association of International Petroleum Negotiators

The focus of the study is upon the development of legal regimes for decommissioning of oil and gas installations. Much has been written about the emergence of an international legal regime to treat this problem, but little has yet been written about the efforts of national governments to translate these framework rules into domestic law in ways which balance the need to provide for the problem with the provision of continued incentives to oil companies to make long-term investments. In particular, little attention has been given to the difficulties of adapting existing legal regimes which are silent on this issue.

A major goal of the study is to provide an overview of the legal instruments available to deal with the decommissioning problem. By way of introduction, there is a summary and brief analysis of the various conventions and other instruments of public international law already in place. The emphasis here and throughout the study is upon decommissioning in offshore areas. This notes the problem areas and uncertainties, the variety of soft law instruments and the potential for further rules and guidelines to emerge in the future.

At a more day-to-day level, the relations between host government and investor are regulated by the statutory and contractual arrangements in place. The study examines the impact of different contractual arrangements upon the problem: concession-style; production sharing and service contracts. Although many contracts are confidential in character, some are in the public domain. In other cases, model contracts are available to provide guidance as to what arrangements a host government expects to see in place. The selection of countries includes producing countries from around the world, but with an emphasis upon the North Sea and Asian Pacific regions, due to the greater availability of materials on the regimes in these areas. The formal contractual differences do not so far appear to have been of much importance in designing provisions on decommissioning.

Following a review of many national laws and contractual arrangements, the study concludes that only a very few countries have as yet made detailed provision for decommissioning, even after more than ten years of international debate on the subject. The majority contain at the present time only the most basic frameworks for decommissioning measures in their laws and model contracts, leaving a great deal to be negotiated at a later date with the oil companies, and providing potential investors with little guidance as to host government expectations. However, a survey of some recent statutes and draft petroleum laws suggests that a `minimum content' of rules on decommissioning is beginning to emerge, in both developing and developed countries.

Among the specific issues examined are the following: the role of abandonment funds in providing for abandonment costs and their treatment by the fiscal regime; the growing practice of requiring by statute some form of forward planning for decommissioning by the contractor and what it entails; fiscal aspects, including tax treatment of accruals and expenditures and cost recovery provisions and responsibility for decommissioning.

The conclusions reached include the following:

The kind of abandonment fund envisaged in some recent contracts in the Republic of Azerbaijan is both detailed and innovative, not least because the Caspian Sea is an area of particular ecological sensitivity; the trend towards forward planning is a highly uneven one, with many governments apparently reluctant or unable to develop specific programmes to deal with the problem; the need to balance forward planning with flexibility is noted, largely because the final date of decommissioning is capable of being postponed for a variety of reasons and a company will usually have every incentive to do so; the way in which responsibility is affected by a transfer of title from the contractor to the host country or national oil company (or vice versa) will remain a key issue for a long time, not least in cases where the contract is otherwise silent.

The study should be considered an interim report on the legal approaches to the problem. At the present time, many changes are at the planning stage in various countries around the world. An effort has therefore been made to equip AIPN members with a broad database of relevant materials. The wide range of references to applicable laws, regulations and contracts assembled here is designed to assist AIPN members in conducting their own further studies and research. The value of this will be apparent to many of them already, since this is a problem which they will confront more and more in the coming years.

Some Introductory Remarks

The decommissioning of oil and gas fields is generally agreed to be a problem that urgently requires the design of appropriate legal arrangements for its solution. Such arrangements include a variety of legal rules of international law, national law and of course contract. Yet it is only quite recently that such a consensus has emerged about the problem. Oil and gas fields have reached the end of their productive lives and installations have been abandoned in the course of the industry's long history throughout the twentieth century (particularly in the United States, both on-land and offshore). It is therefore worth asking why lawyers, economists and engineers are now directing so much attention to solving the decommissioning problem, and why governments and companies are finding it necessary to introduce legislation and contractual provisions which specifically aim at dealing with the problem.

The current interest in decommissioning has at least two sources. Firstly, the maturing of the large number of oil and gas fields in offshore waters around the world in recent years has focussed attention on the costs of removing and disposing of the various installations and structures required for their commercial development. Although often situated far away from populated land masses, many of these installations and structures are located in or near to waters used for international navigation or other purposes by a variety of users. This has ensured a high level of interest in options chosen for their removal and disposal from parties not directly involved in contractual arrangements for oil and gas development and production. The formidable cost of removing some of these installations has vividly illustrated the stakes for both oil companies party to the basic contractual arrangement and for governments with tax revenues at stake. A study of the costs in Europe recently put them at around US$ 22 billion for the removal of the 1,600 rigs in the European Union and Norway, requiring a cash outlay of US$ 1 billion annually over the next 25 years. For estimates of the global costs, other studies have suggested that figures of a higher order of magnitude are appropriate. Inevitably in such a context, the allocation of responsibility for removal and disposal, the provision of mechanisms for enforcing performance of obligations and fixing liability for any subsequent damage are very serious matters indeed.

A second reason for the current concern is that the issue of decommissioning these offshore fields has coincided with the growing impact of environmental concerns in international affairs. This is not, however, a simple uni-linear process but rather one in which emotion, ignorance and a lack of reliable information can play an important part. The 1995 Brent Spar disposal in the UK sector of the North Sea is an example of this. Even when a proposal for decommissioning raised no issues of international law and involved only the application of the procedural requirements of a country's legal regime, it became a subject of concern to non-oil industry groups in neighbouring countries whose opposition compelled the decommissioning to take a different course. The protests of Greenpeace, the environmental pressure group, forced a review of Shell's preference for dumping the structure in the deep sea. The host government had approved the oil company's proposal but the company had to take into account the very different body of opinion in a larger national market, Germany, where its petrol stations came under attack, its products were boycotted, and where it was clearly losing the argument.

For these and no doubt for other reasons, a consensus of opinion had emerged by the mid 1980s that a legal vacuum existed which had to be filled. With the development of basic international standards for the continental shelf areas, a momentum was given to host governments to review their existing legislation for abandonment of all kinds. Usually, such legislation was found to contain scarcely more than a requirement that operators or contractors plug wells once abandoned. The legislation often imposed standards that suddenly appeared weak and unenforceable, such as `good oil field practice' and `normal international industry practice'. Detailed provision for the funding of abandonment, for fixing responsibility, for allocation of costs between host government and oil company and for any state monitoring of the process was nearly always lacking. For countries with state oil companies, a worse scenario appeared. The very installations and structures that had eventually to be removed were ones which by the time of decommissioning would have been transferred to the state oil company or the host government. Once title had transferred to the state, in accordance with clear provisions in the contract, it would be hard to argue that title did not also imply responsibility for the costs of removal and disposal. The former contractor would on this view have no responsibility for clean-up costs. While the level of awareness varies from one host government to another and from one petroleum province to another, there is now a general recognition that most governments will have to introduce new legislation to provide for an abandonment regime, if they have not already done so. Moving beyond this general awareness to taking practical steps - by legislation and by contract - is the subject of this study.

By examining the measures taken in a number of countries around the world, the study identifies the principal issues that governments and oil companies will have to tackle and the various legal mechanisms available to deal with them. It also considers likely treatment of abandonment issues under existing regimes which provide only inadequate means to deal with them. It examines important developments in the North Sea regimes that are based upon a concession-style system, and then approaches to decommissioning based upon a production sharing system. These are not always well-known outside their national context and are therefore described in some detail. The international law context is also sketched out, but since this is rather familiar the treatment is in a summary fashion. The emphasis is upon decommissioning issues in offshore areas rather than on land, since they are the ones that raise the issues most vividly at the present time. Reference will nevertheless be made from time to time to differences that may arise in dealing with onshore removal and disposal.

As a comparative exercise, the study has to be seen as yielding results of an interim character. Only a few governments have taken steps to develop legal regimes for abandonment. Where legislation is lacking or of a framework character only, oil companies have been left to develop the detail of a regime by means of contract. In this respect, much of the contract design is of a pioneering character. Already however, one can see a pattern emerging, as abandonment plans and funds of various kinds are put into place around the world. As more data becomes available, it should be possible to build upon the material presented here. Moreover, both governments and oil companies are still on a learning curve, with only a limited number of removals and disposals having taken place offshore. The extent to which rules on decommissioning are likely to be affected by the wider development of environmental law is also unclear at this stage. Nonetheless, the vulnerability of the oil and gas industry to changes in environmental law and policy is beyond doubt, especially since a number of well-publicised controversies. Examples include the operations in the Arctic National Wildlife Refuge in Alaska, Shell's operations in Nigeria, Unocal's Myanmar-Thailand pipeline, BP and Occidental's operations in Colombia and Shell/Mobil's activities in the Madre de Dios area of Peru. As already mentioned, this is an area in which public opinion can have a strong and unpredictable influence. Strict adherence to the legal requirements of today may be small protection against the climate of environmental opinion in future years.

Although the study covers a wide geographical space and the most recent developments of which the author is aware, no claim is being made of comprehensiveness. Inevitably, the coverage is dependent upon material which the author is aware and has been able to gain access to.

Professor Peter Cameron