Changes to the Australian offshore oil and gas decommissioning frameworkSep 2021 | Energy & Resources
Is this the 'new normal' for late life oil & gas assets in Australia?
In 2015, by a series of transactions, the Northern Oil & Gas Australia Pty Ltd (NOGA) group of companies acquired the Laminaria and Corallina oil fields in the Timor Sea (approximately 550km offshore of Darwin) and the associated Northern Endeavour floating production storage and offtake facility from Woodside Energy Ltd (Woodside) and Talisman Oil & Gas Pty Ltd.
NOGA’s acquisition followed an announcement by Woodside that it intended to cease production and commence decommissioning the fields in late 2016.
In early 2020, the NOGA group went into liquidation, leaving the Australian Government with responsibility to ensure the safety of the field and the marine environment. It has been speculated that the cost to remove the facilities and to rehabilitate the oil fields will be in excess of $200 million, and may be as high as $1 billion.
To ensure Australian taxpayers do not bear these costs, the Federal Government announced the introduction of a temporary levy on all offshore petroleum production in the 2021-2022 Federal Budget. The levy, to be applied at a rate of $0.48 per barrel of oil equivalent, is intended to continue until all costs associated with the decommissioning have been recovered.
Following the collapse of the NOGA group, the Federal Government commissioned the Independent Review into the Circumstances Leading to the Administration and Liquidation of Northern Oil and Gas Australia (Walker Report).
At the same time, the Department of Industry, Science, Energy & Resources undertook a review of the legislative, regulatory and policy requirements for offshore oil and gas decommissioning, and released a consultation paper in late 2020 proposing enhancements to the existing regime, including:
- the introduction of oversight of transactions resulting in a change in ownership or control of a titleholder entity;
- strengthening of the financial assurance regime to contemplate planned and unplanned activities; and
- enhancement of the powers of the regulator to require former titleholders and related parties to undertake remedial activities if the current titleholder fails to do so.
The new legislation
On 24 August 2021, Parliament passed the Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Bill 2021 (Cth) (Bill) to give effect to a number of changes to the Australian offshore oil and gas regulatory regime.
The Bill amends the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGS Act) by:
- requiring regulator approval for changes in control of a titleholder;
- introducing new trailing liability provisions; and
- expanding decision-making criteria and information-gathering powers to assess the suitability of entities undertaking oil and gas activities under the regime.
The Bill received Royal Assent on 3 September 2021.
The changes in detail
Change in control
The OPGGS Act did not previously regulate transactions involving a change in the ownership or control of titleholders.
It had been considered that the acquisition of rights to explore for or exploit resources in offshore areas without regulatory oversight or approval gave rise to the potential for entities without suitable technical or financial capability to ‘indirectly’ enter the regime.
Under the new regime, ch 5A of the OPGGS Act requires a person who begins to control, or ceases to control a registered holder of a title, to make an application for the Titles Administrator to approve or refuse the change in control of the registered holder of the title.
A person is deemed to control the registered holder if the person holds or controls 20% or more of the voting rights, or holds 20% or more of issued share capital, in the registered holder.
The Titles Administrator will approve or refuse a change in control having regard to, among other things, the technical and financial resources available to the registered holder after the change in control takes effect, and whether such resources are sufficient to discharge the title holder’s obligations under the OPGGS Act.
New ch 5A also empowers the Titles Administrator to obtain information, documents or evidence from a person if the Titles Administrator believes that there has been or will be a change in control, or an application is made for approval of a change in control of, a registered holder of a title.1
A failure to obtain the approval to a change in control will be an offence under the OPGGS Act, and a ground for cancellation of the relevant title.
The trailing liability provisions
The OPGGS Act previously imposed decommissioning and rehabilitation obligations on title holders, to ensure that risks to the environment are effectively managed in accordance with the OPGGS Act and the regulations.2
Under the amended OPGGS Act, these decommissioning and rehabilitation obligations will extend to:
- a former registered title holder (or a related body corporate);
- a person capable of significantly benefitting financially from the operations authorised by the relevant permit, lease or licence; or
- persons who are in a position to influence the way in which a person is complying with its obligations under the OPGGS Act.
The Minister will have the power to give a remedial direction to any class of persons described above to carry out decommissioning activities (such as removal of infrastructure, plugging and abandoning wells) and to remediate the marine environment in the title area. These ‘call back’ powers can be applied to a person who was the holder of a title no longer in force.
The Government has indicated3 that the power to give a remedial direction to a person other than the current or immediate former title holder is intended to be an option of ‘last resort’ where all other regulatory options have been exhausted.
The trailing liability provisions are intended to:
- ensure that those entities who were responsible for or have influence over the carrying out of the offshore project will remain responsible for the risks, liabilities and costs of decommissioning the project, particularly in circumstances where the title holder no longer exists or has gone into liquidation; and
- change industry behaviour by prompting proposed sellers of a title interest to increase the level of due diligence on the proposed buyers.
The new legislation also amends the OPGGS Act to broaden the powers of the Titles Administrator, responsible Commonwealth Minister and the National Offshore Petroleum Safety and Environmental management Authority (NOPSEMA) inspectors in requesting or obtaining further information, documents and evidence in connection with applications for grants, renewals, variations of conditions of petroleum and GHG titles.
It also introduces several technical changes which are designed to improve the administration of petroleum and GHG titles (for example, by enabling electronic lodgement of applications).
A majority of the new provisions will take effect on a day to be fixed by proclamation. If proclamation does not occur within six months of Royal Assent (being 3 March 2022), then the amendments will automatically commence on 4 March 2022.
Once commenced, however, the trailing liability provisions will operate retrospectively such that the ‘call back’ powers may be enlivened to issue remedial directions against former holders in circumstances where the divestment or surrender occurred after 1 January 2021.
The changes to the offshore oil & gas decommissioning framework represent a further strengthening of various State and Federal legislative regimes that are designed to ensure that taxpayers do not bear financial responsibility for proper decommissioning of surrendered or abandoned projects.
The changes to the OPGGS Act have been passed despite concerns raised by industry during consultation, particularly regarding the uncertainty associated with the trailing liability provisions. In noting these concerns, the Government has indicated an intention that the new powers will be enlivened only after all other available options have failed.
The ‘last resort’ safeguards, however, have not been expressly included in the new regime, and it remains to be seen how the changes will impact upon oil & gas transactions in Australia, particularly with respect to late life assets.
1 Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Bill 2021 (Cth) pt 5A.4, s 566R.
2 Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) s 572.
3 Explanatory Memorandum to Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Bill 2021 (Cth) 2.
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.