Decommissioning planning in the energy transition: key considerations

Achieving the UK Government's target to be net zero by 2050 will require a collaborative approach from stakeholders right across the energy industry. With increasing political and social pressures on the oil and gas sector and in light of the revised OGA Strategy, heritage oil and gas companies are re-calibrating their business strategies to reduce their carbon footprint, attract investment and position themselves as viable energy companies of our time.

A significant aspect of this exercise is assessing whether to diversify operations and the product mix and pursue new energy projects. Put simply, do they decommission or diversify? The outcome will depend on a variety of factors including technical suitability but also the wider legal and commercial issues such as the level of current decommissioning liability.

Decommission or diversify?

The OGA Strategy places a "supporting" obligation on infrastructure owners considering decommissioning to ensure that "all viable options" for the re-use or re-purposing of such infrastructure (including carbon capture and storage) have been "suitably explored".

From a technical perspective this may include assessing the size and location of wells and pipelines and the proximity of infrastructure to other offshore ‘hubs’. Commercially, consideration must be given to whether there will be realistic return on the investment required for diversification or if the costs of decommissioning offer a more cost-effective approach.

In making these decisions companies need to consider their entire asset portfolio in the context of energy transition. Assessment of decommissioning liability of individual assets, together with a review of section 29 notices, decommissioning security agreements (DSAs) and any financial security currently posted under those arrangements will help build the picture of the financial implications of decommissioning compared to diversification.

Decommissioning – the key legal issues

The legal framework associated with the decommissioning of offshore oil and gas infrastructure has two main strands: the contractual and the regulatory. Within the bounds of freedom of contract, parties can agree terms suitable to their co-venture arrangement. Most commonly, this takes the form of a DSA which should be regularly reviewed in conjunction with the anticipated life of an asset. This will allow for sound financial and possible energy transition planning.

From a regulatory perspective, section 29 notices will play a crucial element in assessing decommissioning liability. The notices should be frequently reviewed, and any updates or changes required should be notified to BEIS OPRED.

Energy transition

Given that section 29 notices are inherently linked to hydrocarbon operations, the regulatory position in relation to infrastructure which has changed hands and been re-used for new energy (non-hydrocarbon) operations is currently unclear. For example, in a scenario where a piece of infrastructure previously used for oil and gas is sold and re-purposed for hydrogen use, will the 'new' owners of such infrastructure be within the remit of the Petroleum Act and receive a s.29 notice? If new energy projects are going to increase at pace, stakeholders require certainty of the legal position.

In conclusion, decommissioning planning is more important than ever.

Against the backdrop of continued energy demand, a changing mix of participants in the North Sea and calls for energy transition to happen at pace, oil and gas companies should get a handle on their decommissioning liability now (both from a contractual and regulatory perspective). This will allow them to assess their financial position, identify targets and opportunities and position themselves at the centre of energy transition.

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