- On 14 December 2020, the Department of Industry, Science, Energy and Resources (Department) released a consultation paper entitled "Enhancing Australia's Decommissioning Framework" (Enhanced Framework).
- The paper is the third step in a reform process and follows a Discussion Paper published in October 2018, a process of consultation and stakeholder formal submissions into early 2019. Implementation of the framework is expected to occur in 2021.
- The liquidation of the NOGA group of companies which has left the Australian Government with responsibility for the decommissioning of the Northern Endeavour FPSO facility and associated wells has spurred an urgent reform of the regime. The Enhanced Framework identifies three areas of Australia's offshore decommissioning regime where improvements could be made to better protect the interest of the Australian community.
- Interested parties may submit comments on the Enhanced Framework and its implementation by 22 January 2021.
Decommissioning offshore installations is a challenging area, raising complex engineering, environmental, societal, investment and cost issues. This reform process will occur against a backdrop of open and public scrutiny, as the circumstances of the Northern Endeavour FPSO are widely known.
While extensive submissions on the Discussion Paper were made in early 2019, that consultation process occurred prior to the problems associated with the Northern Endeavour FPSO. It is evident that the Australian Government now seeks to overhaul the protections available to its agencies with the objective of ensuring that this circumstance is never repeated.
Earlier this year, the Department commissioned an independent review by Stephen Walker of the circumstances surrounding the Northern Endeavour. That review can be accessed here. Essentially, the Department has concluded that the current decommissioning framework under the Offshore and Petroleum Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) is broad enough to deal with Australia’s maturing offshore petroleum industry, subject to the revision of a number of aspects of the existing framework.
Uncommonly, it is the Department’s current intention to backdate legislative measures to implement the Enhanced Framework to 14 December 2020. This is despite those measures being unsettled at this time.
Key components of the proposed Enhanced Framework are outlined below.
The Enhanced Framework proposes to expand the types of transactions requiring Government assessment and approval to include any change in the ownership or control of a titleholder entity through a corporate merger, acquisition or takeover.
In addition, the Enhanced Framework proposes changes to the current financial assurance requirements for decommissioning by:
- Expanding NOPSEMA’s monitoring and compliance of a titleholder’s duty to have sufficient financial assurance under section 571 of the OPGGSA.
- Requiring titleholders to provide tangible forms of financial assurance, such as bonds or securities, to demonstrate they have sufficient assurance to meet the costs, expenses and liabilities associated with carrying out petroleum activities including decommissioning.
- Recommending that NOPSEMA remains responsible for enforcing the requirements for financial assurance, with the level and form of financial assurance to be determined at NOPSEMA’s discretion.
Planning and management
The Department proposes to enhance and modernise the requirements and use of a Field Development Plan (FDP).
The Enhanced Framework will require titleholders to address early stage decommissioning in their FDP and will introduce a mandatory review period for an FDP.
Accountability and trailing liability
Under the Enhanced Framework, the Department proposes to:
- Improve the use of remedial directions under the OPGGSA by using these powers earlier in a project’s life and introducing an ability to regularly review and amend remedial directions.
- Explore the use of regulatory tools and licences to enable post-decommissioning monitoring.
- Introduce a public comment period on decommissioning environment plans, public reporting of environmental performance once a petroleum activity is underway and publication of ‘close out reports’ once an activity has been complete, to NOPSEMA’s satisfaction.
- Expand NOPSEMA and the responsible Commonwealth Minister’s existing powers to ‘call back’ a former titleholder, regardless of how a titleholder’s interest in the petroleum title ceased.
- Introduce the concept of a ‘related person’ for the purposes of trailing liability.
Overall, many of the points that are identified for reform do not come as a surprise. Every jurisdiction is investigating the extent to which their decommissioning regime is fit for purpose.
We expect that during the next round of public consultation, the following issues will receive considerable attention:
- Possible retrospective application of the reforms and whether titleholders should reasonably be expected to assume liabilities that did not exist at the time that they made their investment or disposed of their interests.
- There are numerous measures under consideration that seek to address financial security – measurement, form, when it is required and maintenance are all controversial. Achieving a coherent and balanced model will be not be easy.
- The UK experience is that security overreach can have a depressing effect on petroleum activity and post the Macondo spill the implementation of security bonds has been problematic in the Gulf of Mexico.
- The Enhanced Framework does not identify the exact manner and form upon which the trailing liabilities will be engaged. We expect views will diverge on how far back liability can be traced.
- The decision mechanism for determining who is best placed to carry out the assessment of financial adequacy and appropriateness. The Department may look to NOPSEMA, but there are numerous issues with this, including that there is currently no avenue for the review or appeal of NOPSEMA decisions. There is also the question of what happens to a project where one titleholder cannot post security.
- The taxation treatment of these legacy exposures as PRRT clawback/rebates are available to current titleholders to aid the funding of these works. It is unclear whether the same will be available to prior titleholders or related entities.
The sense of urgency in the Enhanced Framework is apparent. We observe that the issues are complex and significant challenges lie ahead to ensure that the balance is reached to assure the Australian community that appropriate measures are in place to ensure that the decommissioning works are carried out, whilst not overburdening the industry with compliance costs and unmanageable risks. A key part of Australia's COVID reforms is the "Gas-powered Recovery", where the Department is seeking to incentivise new gas field development to support the Eastern States' domestic gas market with new and low cost gas supply. How the Enhanced Framework may interplay with those recovery measures is yet to be seen.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021