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            Decommissioning an oil installation: a liability meltdown?

            Date: 17 March 2017

            Date: 17/03/2017

            There is little dispute that the decommissioning of oil installations is big business. Oil and Gas UK — the industry body — suggests it will cost nearly £17bn over the next 10 years to remove around 80 platforms and their associated infrastructure. This immense level of expenditure will provide astonishing commercial benefits to companies that are able to develop commercially viable decommissioning solutions.

            According to DecomWorld, a total of around 150,000 tonnes of material will need to be removed from the North Sea. To break that down, that is around 105 topside modules, 35,000 tonnes of jackets and 3,000 tonnes of sub-sea facilities. This can be broken down further: the average topside module weighs 1,710 tonnes and is currently estimated to cost £4,200 per tonne to remove. The maths equates to operators generating around £754,110,000 in operational revenue. It is therefore estimated that if decommissioning is distributed over a 30- year period, big players in the industry will be able to generate on average £15,822,200 per year in revenue. It is even possible that this could be under-valuing things. Decommissioning costs are often more than expected. For instance, the North West Hutton Decommissioning Programme was expected to cost £160m but actually cost £246m. Such cost discrepancies are unacceptable to the industry and North West Hutton is just one example of when things do not go according to plan.

            Decommissioning an offshore platform is a complex task and is composed of technically challenging phases that require lots of coordination between a multitude of contractors and sub-contractors. Most uncertainties tend to stem from the failure of parties to understand where liabilities do actually lie. The parties to contracts in the decommissioning industry can try to apportion risk as they think fit rather in accordance with a regulatory legal framework or an accepted approach to risk allocation. One example of this is that there is currently no standard form contract for decommissioning agreements which sets out an accepted division of risk. The excuse that is often used is that the industry is in its youth and hence needs time to develop its legal infrastructure. This may be true but it makes the whole area a hotbed for dispute.

            The industry must develop and implement a sound commercial strategy for heavy lifters and other key contractors whilst supporting tenders and contracts in a commercially viable way. The industry needs legal support from removal to disposal and needs both peripheral and central risks to be minimised.

            Of particular concern is the legislative gap in the international law regarding liability for offshore activities. This produces a number of uncertainties when attempting to determine liability: if the topside of an installation is removed and the footings are left to form a reef then there is an imperceptible danger to any passing ships. When determining this type of liability it is necessary to revert back to fundamental legal principles and attempt to establish if the operator owes a duty of care to the pursuer (whether that be a ship company or otherwise). The UK adopts a light touch approach in this respect, looking to the guidance from the Petroleum Act 1998. Under this legislation an operator must provide at least six weeks notice to the UK Hydrographic Office in order to allow mariners sufficient enough time to make the appropriate amendments to their nautical charts. This is in accordance with the international requirements under Article 60(3) UNCLOS which requires that ‘appropriate’ publicity be given to the depth, position and dimensions of any installations that have not been entirely removed. It would appear that if the operator were not to carry this out then liability would reside with it.

            Liability in respect of offshore contracts has been under scrutiny since the Deep-water Horizon disaster and this will continue. Shareholders, the industry generally, and their advisers have to navigate a way through any potential pitfalls. Relying on the allocation of risks found in the LOGIC Construction Contract will not be appropriate since unlimited indemnities are unlikely to be commercially acceptable in decommissioning. Much as the financial rewards do exist in decommissioning, the contract price for such work is unlikely to support such unlimited liabilities and any contractor would want to cap their exposure to this risk.

            The main answer to the above is of course insurance: a policy that covers all the liabilities incurred under statute, international conventions and common law will ostensibly do the trick. This allows for liability to be apportioned in the contracts and then transferred to the insurers through insurance policies; that however is not the end of the story. It is important, given decommissioning contracts and policies are less established than their construction equivalents, that particular attention is paid to liability from the outset of negotiations.

            This article has only raised a few of the issues; a whole topic in itself would be perpetual liability under the Petroleum Act. This is a disquieting prospect for many and something that contractors will need to be aware of (and to consider how to avoid).

            The decommissioning market will undoubtedly continue to grow and thrive. We must be mindful however of the limited experience in this area and with the absence of a standard accepted form of contract, it seems likely that lessons will have to be learnt before we can properly identify, allocate and understand all the risks at play.

            Authors: Iain McLean, Partner and Jordan Gray, Trainee Solicitor

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