Decommissioning responsibilities and liabilities in the offshore sector are increasingly shaping joint venture arrangements (JV) and M&A transactions within the industry.
Allens, a leading international law firm which offers clients a network of 40 offices in 25 countries through a global alliance with Linklaters, published an insight paper on 1 September highlighting how deals are being affected.
As Australia’s offshore oil and gas sector enters a period of increasing asset maturity, it notes, decommissioning is rapidly becoming one of the industry's most significant commercial, regulatory and financial challenges.
“The focus is no longer limited to the technical execution of decommissioning activities,” the law firm states, “participants must also address complex issues around the allocation of decommissioning liabilities in joint ventures and M&A transactions, evolving environmental planning and approvals requirements and the tax treatment of decommissioning expenditure.”
In a multi-part series, the law firm intends to explore each of these areas and examine the legal and regulatory frameworks that are shaping decommissioning outcomes across Australia’s offshore oil and gas sector.
In the first Insight, it provides an overview of the decommissioning regime under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) and examines how it is influencing JV arrangements and M&A transactions in the offshore oil and gas sector.
Key takeaways
• Australia’s offshore decommissioning regime under the OPGGSA imposes ongoing obligations on titleholders to decommission offshore infrastructure and remove property that is no longer required for authorised activities. Those obligations must, generally, be satisfied before a title can be surrendered.
• The OPGGSA is supported by significant enforcement powers, including civil and criminal penalties and the trailing liability regime, under which former titleholders and related entities may remain exposed to decommissioning liability after disposing of their interest in offshore petroleum assets.
• The trailing liability regime has important implications for joint ventures. Participants should consider whether their JOAs adequately address decommissioning cost allocation, governance, funding, default risk and potential residual exposure under the trailing liability regime.
• Decommissioning is now a central issue in offshore petroleum M&A transactions. Buyers and sellers should consider decommissioning exposure as part of due diligence, transaction structuring, contractual protections, security arrangements and the allocation of responsibility for existing and future regulatory obligations.
• While parties can allocate decommissioning risk contractually, a complete ‘clean break’ is no longer possible from statutory liability. This has increased the importance of indemnities, security arrangements, funding mechanisms and enhanced disclosure in transaction documentation.
Looking ahead
According to Allens, as Australia's offshore petroleum sector enters a period of increasing decommissioning activity, participants can expect continued policy, regulatory and commercial focus on the allocation and management of decommissioning liabilities.
“In that environment, decommissioning considerations are likely to become an increasingly prominent feature of joint venture negotiations, asset acquisitions and divestments and broader portfolio management decisions across the sector,” it notes.
“Participants should ensure they have a clear understanding of how decommissioning obligations and liabilities are addressed in both joint venture arrangements and M&A transactions, including the allocation of responsibility and cost between parties, the treatment of contingent and future liabilities, and the potential for residual exposure to persist notwithstanding asset divestments, title surrender or the completion of decommissioning activities.”
