Offshore oil & gas sell-off puts focus back on decommissioning policy

This article was first published in Australian Energy Daily © Peter Milne.

The importance of who buys ExxonMobil’s Bass Strait infrastructure and takes responsibility for an eventual multi-billion-dollar cleanup bill has been highlighted by the move into voluntary administration of the owner of an offshore oil vessel with a A$144 million decommissioning liability.

Northern Oil and Gas Australia, the unlisted owner of the Northern Endeavour oil production vessel in the Timor Sea, went into voluntary administration on Friday.

It comes as the federal government prepares to issue policy options in the wake of an almost year-long review of the offshore oil & gas decommissioning framework.

Production was halted on the Northern Endeavour in July after two dangerous accidents led the offshore safety regulator NOPSEMA to demand a maintenance backlog be cleared, a fire-fighting system fixed and corrosion addressed.

The vessel and the associated Laminaria and Corallina oil fields have a provision for “rehabilitation and restoration” of US$97.5 million (A$144 million), according to the group’s most recent accounts filed with ASIC for the year ending December 2017.

If the administrators are unsuccessful in either revitalising the company or selling the vessel then the Australian government will be left with the cleanup bill.

In contrast in the UK decommissioning costs are only borne by the government as a last resort.

If the owner of a facility offshore the UK cannot pay for decommissioning the liability first falls to the previous owners.

Woodside Energy, that sold the Northern Endeavour to NOGA, does not face that liability under Australian law.

Woodside had initially planned to decommission the vessel itself. Instead, in 2016 it paid NOGA US$16.5 million to take the vessel, fields and decommissioning liability, according to NOGA’s 2016 accounts.

A spokesperson for Minister for Resources Matt Canavan told Australian Energy Daily that the National Offshore Petroleum Titles Administrator is engaging with the administrator KPMG about the obligations of holders of offshore titles, including decommissioning costs.

“It is premature to discuss any decommissioning liability falling to the Commonwealth,” the spokesperson said.

Large liability for sale

NOPTA may soon have to consider the transfer of Australia's first offshore production facilities, the ExxonMobil-operated system of 23 platforms and 600km of pipelines in the Bass Strait.

The US giant announced last week it would sell its half share of its joint venture with BHP that has produced four billion barrels of oil and eight trillion cubic feet of gas since Australia’s first offshore well was drilled in 1965. BHP has not said if it also intends to sell.

Major oil companies often lose interest in older assets as production declines and look to sell them to smaller companies that can operate them at less cost. The question for regulators is whether the lean cashflow towards the end of a field’s life is sufficient to cover the abandonment of the wells, platforms and pipelines built in more profitable times.

Decommissioning costs were thought to be the main reason the two companies abandoned an attempt to sell just the joint venture’s oil assets in 2016.

Canavan’s spokesperson said he understood that before NOPTA approved the transfer of a title it considered the financial capability of the new owner to meet its obligations, including decommissioning.

“NOPTA would not approve the application unless it was satisfied on these matters at the time the transfer was approved,” Canavan said.

Senator Canavan’s spokesperson said a review of offshore oil and gas decommissioning is due to issue policy options towards the end of this year and the government would make a final policy decision in 2020.

With a sale likely to take two to three years Exxon and possible buyers such as Beach Energy and Santos will be watching the outcome closely.

Main image: Marlin B platform in the Bass Strait. Source: ExxonMobil Australia