Federal Govt paying top-dollar $1.5M a week for failed oil project

The Northern Endeavour’s operator appears to be billing the Federal Government more for minimal manning of the oil vessel than it did for a full production crew. At the same time, original owner Woodside will charge $8.8 million for advice on what to do next.

Northern Oil and Gas Australia went into liquidation in early February with debts of more than $165 million. It left the Federal Government with the responsibility for keeping the Northern Endeavour safe and a possible decommissioning bill of up to $230 million.

The failure of NOGA had been a real possibility since it entered voluntary administration in September 2019 after the safety regulator NOPSEMA ordered production to cease in July due to the vessel’s “degraded state.”

The burden on the Australian taxpayer is growing, as shown by a review of Federal Government tenders by Boiling Cold.

The bills for the Northern Endeavour so far

Upstream Production Solutions - operations & maintenance services

• 13 Feb 2020 to 30 Apr 2020: $12,136,412
• 1 May 2020 to 31 Oct 2020: $35,440,240

Arthur J Gallagher and Co – insurance

• 2 Mar 2020 to 15 Oct 2020: $6,915,864

Woodside – advice on possible decommissioning

• 24 Jun 2020 to 23 Jan 2021: $8,800,000

Gaffney Cline – due diligence of options

• 23 Jul 2020 to 30 Nov 2020: $118,934

NOGA paid Upstream Production Solutions to operate the Northern Endeavour after it took over the vessel from Woodside in 2016.

After NOGA failed UPS owner GR Engineering wrote off $17.6 million of bills not paid by the vessel owner.

Since February, UPS has fulfilled the same role for the Federal Government while the vessel is in lighthouse mode: no production, minimal crew and only critical maintenance undertaken.

The current UPS contract is equivalent to almost $71 million a year to keep that minimal crew, understood to be between 10 and 12 people, offshore in the Timor Sea.

This charge is almost as much as past UPS annual revenue from many assets across the country.

The annual report of GR Engineering for the 12 months to June 2019 showed UPS revenue was $88.4 million.

In that year UPS operated a fully-crewed Northern Endeavour while it was producing oil, maintained 3500 gas wells in Queensland, and provided operations and maintenance support to Mitsui, ENI and Triangle Energy for onshore and offshore fields in WA and the NT.

Boiling Cold asked UPS why it was charging so much to operate the Northern Endeavour in lighthouse mode. The company did not respond.

Independent Senator for South Australia Rex Patrick said the taxpayer seemed to be paying UPS more to operate the Northern Endeavour in lighthouse mode than it had cost NOGA to have UPS operate it as a production facility.

“I don’t think anyone could reasonably reconcile this and the Minister owes the public an explanation,” Patrick said.

Operating and insurance costs are about $1.57 million a week.

Boiling Cold asked Resources Minister Keith Pitt what action the Government had taken to ensure it was not paying an excessive amount. The question was not answered.

A spokesperson for the Department of Industry, Science, Energy and Resources said UPS was a respected and reliable operator.

The Government is also paying for insurance and oil spill preparedness while it decides what to do with its unwanted inheritance.

Planning decommissioning twice

Earlier this month Minister Pitt announced Woodside was advising the Government on what was required to decommission the facility and associated oil fields if the Government chose that option.

“As a previous owner of the Northern Endeavour, Woodside is well placed to provide timely, detailed advice,” he said.

Indeed, Woodside had plans to decommission the Northern Endeavour in 2015. It will now receive $8.8 million to revisit the issue, equivalent to almost $60,000 a day for seven months.

Woodside advertised its intention to decommission the Northern Endeavour in mid-2015 but two months later agreed to pay the newly-formed NOGA $24 million to take the asset over, complete with the decommissioning liability of up to $230 million.

NOGA was significantly under-capitalised and had a fragile business model, according to a report into the company’s failure for the Government by North Sea industry veteran Steve Walker,

“It had taken over an ageing FPSO and with the LamCor (Laminaria Corallina) fields approaching their end of life,” Walker said.

“The NOGA group had limited background in the offshore industry, and with no other income-generating assets was significantly reliant on day-to-day production for cash flows.”

Senator Patrick said Woodside could not in good faith claim it did not bear some responsibility for the failure of NOGA.

“Any advice they are providing the Commonwealth should be on the basis of moral obligation,” Patrick said.

A Woodside spokesperson said the advice would be provided at cost and the sale and transfer of the Northern Endeavour to NOGA was completed in accordance with Australian laws and regulations.

Who pays?

Boiling Cold understands the Government’s favoured option is to decommission the vessel, subsea infrastructure and wells. The alternative of a return to production either requires ongoing Government involvement with significant costs and risk; or passing the asset to a private entity with the chance of another financial failure.

Pitt’s predecessor Senator Matt Canavan in January said a levy on other oil and gas producers was one way for the Government to recoup the cost of dealing with the Northern Endeavour.

The Government is still considering opportunities to recover costs, the DISER spokesperson said.

Senator Patrick said the Government put the taxpayer into this very costly position because they were unwilling to work with NOGA to address the Northern Endeavour’s maintenance issues.

“As much as I would like to see either Woodside or industry pick up the tab, the reality is we are in this situation because of a failure of Government,” Patrick said.

“They were warned of the potential outcome by myself and others well before the mess occurred.

“The Government’s response to this warning was: ‘We won’t be taking anything over. That’s not our role’”.

“And yet that’s exactly where things have ended up.”

Senator Patrick said the Government needed to overhaul its policies to make sure the taxpayer was not left carrying the can on stranded assets and called for the release of the full Walker report.

“The first step in making sure this doesn’t happen again is for a rather large broom to be put through the Departments that were responsible,” Patrick said.

Main image: Northern Endeavour floating production storage and offloading vessel. Source: Northern Oil and Gas Australia.