Decommissioning is an essential part of an oil and gas project’s lifecycle, but it comes with a big price tag at the point when the asset is no longer generating revenue. The forecast for decommissioning spend in the UK North Sea over the next decade is £20bn. So, who is going to cover the cost?

The purpose of the UK decommissioning statutory liability regime is to ensure that it is not the taxpayer, but instead is those licence holders and other companies who have benefited from the asset. The liability regime is therefore wide ranging covering operators, licensees, JOA parties, pipeline owners, installation owners and related entities, who each bear joint and several liability for decommissioning costs. To mitigate exposure to these far reaching liabilities, the industry has developed security arrangements where financial security is held on trust to cover anticipated decommissioning costs in agreed sums and proportions. These arrangements are documented in a Decommissioning Security Agreement and there is an industry pro-forma, which is widely used across the North Sea.

But what happens when there is a disagreement about the amount or form of security? How is the amount of security determined? And who makes the determination – the court or a technical expert?

In a recent case commenced by Apache North Sea Limited against bp, Shell and ExxonMobil, a number of these issues were addressed. Whilst the decision turns on the specific drafting of the DSA (which was an amended form of the industry standard), there are some takeaway points which may be of wider industry interest:

1. The impact of inflation

The terms of the DSA did not require inflation to be considered when calculating net cost, instead it is a matter of judgment for the Operator acting as an RPO as to whether inflation should be considered. In the context of the current inflationary environment, the impact of inflation on security calculations may be substantial and those providing security will be looking to mitigate that impact in their decommissioning plans in order to minimise the amount of security payable.

2. RPO standard

Where an expert is asked to determine whether an estimate has been prepared in accordance with the standard of a RPO, they do not need to conclude that no reasonable and prudent operator would have come to that conclusion before making their own determination. It is a matter for their own judgment, asking themselves what an RPO would have done? This is a lower threshold than the Wednesbury unreasonable type standard argued for by Apache. For similarly drafted DSAs, this lower threshold could prompt more references to experts by counterparties looking to review the amount of security proposed by the operator.

3. Court or expert?

If there is a dispute as to the construction of terms of the DSA, the expert can reach their own view on those disputed terms. The matter does not need to be referred to court first. If the expert does not properly apply the law in their determination, this can later be challenged in court. Again, whilst this conclusion turned on the wording of the DSA, the case law on expert determinations was considered in detail at the hearing and the judgment provides helpful guidance that where the parties have agreed to refer a dispute to an expert, the expert process should be permitted to proceed without interference from the courts.

Take a look at our recent article, co authored with India Furse, detailing the courts findings in further detail.