A discussion about the decommissioning planning process for late stage petroleum fields in this country. David Coull and Mark Cunliffe, Bell Gully.
AS READERS WILL be well aware, the current prolonged period of lower oil prices has brought a number of changes to the upstream industry here.
One effect of this is that fields may reach the end of their economic life more quickly than the medium to longer term timeframes that may have been anticipated several years ago.
These changed economics have brought the nature and extent of the decommissioning obligations which permit holders face into sharp focus. These obligations introduce new considerations for permit holders who have historically (at least in relation to New Zealand operations) focused on exploration, appraisal and production activities.
In connection with the renewed focus on decommissioning obligations, law reform has been introduced in relation to offshore decommissioning obligations as part of the (more general) Resource Legislation Amendment Bill.
In this article we summarise and comment on: Key decommissioning obligations under the current regime, and the changes which will potentially be introduced to that regime in relation to operations in New Zealand’s Exclusive Economic Zone (particularly in light of the recent Departmental Report issued in early November 2016).
Current regime – basic obligation
The most basic decommissioning obligations which permit holders owe are those which typically exist under relatively standard terms of Petroleum Mining Permits. This basic obligation is usually expressed along the following lines:
At the completion of production operations in the permit, the permit holder shall abandon all wells, surface facilities and operating sites in accordance with good exploration and mining practice. Prior to the abandonment of facilities in the permit, the permit holder will submit a report to the Chief Executive of the Ministry of Economic Development describing the proposed abandonment and the reasons for the abandonment.
This basic obligation is general in nature. In part, this reflects the reality that when a mining permit is granted, the state of the field at the time of cessation of production operations is unknown. This makes it difficult to specify, in advance, specific actions which the operator should take in order to abandon the field.
It is also relevant to note that while New Zealand does have experience with wells being plugged and abandoned and certain facilities being decommissioned, abandonment and decommissioning of entire larger scale production operation is not something which has occurred in New Zealand in recent times. As such, although there is clearly significant industry experience which can be taken from overseas, there is a lack of definition as to what constitutes “good exploration and mining practice” in New Zealand in the context of abandonment.
As such, we expect industry members to closely monitor the first decommissioning operations in relation to New Zealand fields.
Resource Management Act
Further obligations are commonly included in the conditions attached to resource consents which permit the conduct of mining activities. It is common for these conditions to include various remediation activities following cessation of operations. As is well known, such remediation obligations can be costly and difficult to undertake.
Other relevant legislation in relation to the conduct of decommissioning includes:
- the Exclusive Economic Zone and Continental Shelf (Environmental Effects) Act (commonly known as the “EEZ Act”), although the EEZ Act does not currently deal with decommissioning in detail at present – see below for commentary on the proposed amendments;
- the Health and Safety at Work Act; and
- the Maritime Transport Act.
The treatment of decommissioning costs under the Crown Royalties regime and the Income Tax Act are also relevant and will likely be important drives in the approach participants adopt. The Crown also has a vested interest in this aspect given the ability for permit holders to spread back decommissioning costs for royalty and tax purposes.
Legislative change – Resource Legislation Amendment Bill
The Resource Legislation Amendment Bill will (assuming it is passed into law) introduce a detailed regime regulating the decommissioning of facilities in the Exclusive Economic Zone.
The current status of the Bill is that it has passed its first of three readings in Parliament. The Bill is expected to be reported back to the House in May 2017. That version of the Bill is expected to incorporate the amendments coming out of the Select Committee process. The recent Departmental Report (released on 8 November 2016) provided some helpful clarification regarding the likely content of the Bill.
Industry has already been given a chance to comment on the initial form of the Bill through the Select Committee process. Further consultation through the Select Committee process is not expected, but there is some residual chance of further engagement.
By way of background, the key provision in the Bill relating to decommissioning plans (which does not include the amendments proposed in the Departmental Report, see below) reads as follows:
100A Owner must submit decommissioning plan
(1) The EPA may, by written notice, require the owner of an offshore installation to prepare a decommissioning plan.
(2) The decommissioning plan must be prepared in accordance with regulations (if any) prescribed under section 27.
(3) The owner must:
(a) consult the EPA about the decommissioning plan within the period (if any) prescribed by regulations; and
(b) apply for a marine consent for every discretionary activity that is proposed as part of the decommissioning plan.
As indicated above, the Departmental Report recommended a number of amendments. Assuming these are given effect to, the following key additional changes will be made:
- a decommissioning plan will need to be submitted to the EPA prior to decommissioning-related marine consent applications being lodged;
- the decommissioning plan will be subject to public consultation;
- the EPA will be able to accept the plan subject to criteria set out in the regulations;
- all subsequent decommissioning-related marine consent applications will need to include an accepted decommissioning plan and be in general accordance with that plan; and
- subsequent decommissioning-related marine consent applications will not require further public consultation and must be processed within nine months of being accepted by the EPA.
Key details of the obligations are likely to be determined by the regulations (the content of which is not yet known) and the approach taken by the EPA. However, despite these variables, there are several important points which can be noted at this stage:
- At a high level, it should be expected that further compliance obligations will be required in relation to decommissioning. Although we expect prudent operators would be preparing detailed plans before embarking on decommissioning, the involvement of a regulator in the planning phase has the potential to increase planning complexity. We expect this will be particularly relevant with the initial decommissioning plans which are reviewed by the EPA.
- As a related point (and despite the Departmental Report recommending a nine month processing time for certain marine consent applications) the changes are likely to introduce additional timing restrictions, requiring earlier planning and engagement.
- Although approval of a decommissioning plan will remove the need for further public consultation in relation to related marine consent applications, there is no guarantee that those marine consents will be granted.
Other decommissioning related changes of importance recommended in the Departmental Report include:
- The requirement of a marine consent to abandon submarine pipelines in-situ.
- Future marine consent applications for new pipelines and structures will need to demonstrate consideration of decommissioning.
- The EPA will be restricted from imposing conditions that would conflict with another marine management regime or the Health and Safety at Work Act.
- It appears that there will be a relative degree of lead time and a transitional regime so that owners of offshore installations are not required to prepare and submit a decommissioning plan until the relevant regulations are in force.
We expect industry participants to watch these developments with interest as they start to play out in the decommissioning planning process for late stage petroleum fields in New Zealand.