by Andrew Hodinkson, Senior Engineering and Resources Adjuster and Regional Head - Australia and New Zealand and Nigel Lloyd, Senior Engineering and Resources Adjuster, for Insurance Day, first published on 15 February 2021: Viewpoint: Insurance is critical to the decommissioning of offshore installations

Since the drilling of the first offshore well in the Bass Strait in 1965 to the modern coal seam gas boom in Queensland, Australia’s oil and gas industry has delivered enormous benefits for the country in the form of export earnings, domestic economic activity, employment and investment.

The Australian industry has also created and sustained a globally respected and innovative technology, services and manufacturing sector with key players headquartering in cities such as Perth, Western Australia.

During the past decade, this mature industry has enjoyed substantial investment in the sectors of liquified natural gas (LNG), primarily in Western Australian and Northern Territory (offshore reserves) and Queensland (coal seam gas), as a result of which Australia is now one of (if not the biggest) exporters of LNG to overseas markets.

Australian companies have in this time developed expertise across drilling technologies, geophysics software, pipeline construction materials and methods, engineering and design and geotechnical engineering and assessment, as well as advanced safety training, rehabilitation and facility management.

"Nopsema considers the complete removal of infrastructure and the plugging and abandoning of wells as the base case scenario for all offshore decommissioning activities"

This expertise and experience will now be equally important as it is deployed towards the challenge of decommissioning end of life assets such as those found in the Bass Strait or North West Shelf regions.

Australia’s offshore energy regulator, the National Offshore Petroleum Safety and Environmental Management Authority (Nopsema), considers the de­commissioning of an offshore project to be an inherent part of a project and one that should be planned from the outset and undertaken throughout the operations. It involves the safe, and environmentally responsible, removal of (or otherwise satisfactorily dealing with) infrastructure from the offshore area that was previously used to support oil and gas operations.

Regulatory requirements
Last year, Nopsema announced it would be applying heightened scrutiny to the planning and execution of decommissioning during assessment of permission documents and activity inspections.

The biting “teeth” in this process is the Section 572 Maintenance and Removal of Property Policy, which came into effect in April 2020. This places significant environmental, clean-up and disposal burdens on energy companies, which lead to expensive but mandatory costs.

Nopsema considers the complete removal of infrastructure and the plugging and abandoning of wells as the base case scenario for all offshore decommissioning activities. A titleholder may propose decommissioning options other than the complete removal of infrastructure, but the proposed option must deliver equal or better well integrity and environmental outcomes.

This is serious business, because Nopsema will challenge any arguments made by titleholders that attempt to inaccurately represent the feasibility or practicability of complete removal of infrastructure. For example, when assessing decommissioning options, titleholders should be considering the use of decommissioning campaigns, the availability of nearby rigs and vessels, emerging technology and the collaborative use of decommissioning resources.

Titleholders are permitted to propose decommissioning options. When a preferred decommissioning option is finally selected, Nopsema may require the titleholder to provide a range of scientific studies and environmental data to support that selection. For example, a titleholder may choose to identify, measure and assess the value of offshore infrastructure to fish assemblages to support their case for leaving infrastructure in the marine environment.

However, if a titleholder proposes to leave infrastructure in the marine environment, their environmental plan must then demonstrate the acceptability of any long-term impacts and risks of leaving that infrastructure. This is a difficult scenario to achieve.

Given the present low oil price environment, Nopsema has “doubled down” on its scrutiny of operators, not only in respect of maintenance but also planned/required decommissioning. This latter aspect is increasingly relevant as the low price of oil drives some fields into an early un­economic operating position.

Sale of assets
One potential strategy for an operator is the consideration of selling their assets while they are producing, given the fields’ “best years” are behind them. In this way the decommissioning costs (which are likely to be factored into the sale) and the associated risks are transferred to others. But is it this easy? The short answer is increasingly “no”.

A recent example of an asset sale that turned into a political hot potato was the sale of the Timor Sea-located Laminaria & Corallina field floating production, storage and offloading unit Northern Endeavour by Australia’s largest energy company, Woodside Petroleum, to a small, untested independent operator, Northern Oil and Gas Australia (Noga).

Production levels had dropped to less than 10% of peak production at the time of sale, yet Noga had plans to resurrect production levels for this ageing facility. Unfortunately, within a short time of the sale Nopsema ordered the FPSO to be shut down because of safety and maintenance issues. Noga was placed into liquidation and it became apparent the Australian government now had an unexpected decommissioning project on its hands.

"There is no doubt decommissioning of offshore assets will be taken seriously by the regulators and the federal government and that costs will be increasingly high (estimated to be in excess of $20bn over the coming decades)"

Indeed, the Australian government took hold of the assets and is expected to spend some A$300m ($233.2m) in decommissioning the FPSO over a two-year period. Stemming from the tax-payer’s distaste, this situation has already triggered legislation review.

Meanwhile, as the price of oil plunges, this draws other operators with ageing assets into conundrums. One recent example involved the Italian operator ENI. Nopsema gave ENI 12 months to fully decommission its Woollybutt oil field (offshore Western Australia), which has not produced for nine years and became a marine hazard in 2020. ENI also must start planning the decommissioning of another field Blacktip (offshore Western Australia). Not surprisingly, ENI has halted the sale of its Australian assets, valued at around $1bn, after they failed to attract satisfactory bids, as reported by Reuters last month.

No doubt more sales and decommissioning challenges will follow as operators scramble to avoid incurring large costs on depreciating assets.

Legislation changes loom
The earlier examples and issues have led the Australian federal government to review the decommissioning process in more detail. In December 2020, Keith John Pitt, Australia’s minster for resources, water and Northern Australia, advised the maturing offshore industry will see see an increasing number of projects and assets reach the end of their productive lives and there will be a move into a decommissioning phase over the next two decades (see box).

There is no doubt decommissioning of offshore assets will be taken seriously by the regulators and the federal government and that costs will be increasingly high (estimated to be in excess of $20bn over the coming decades).

As the responsibilities are set to increase for operators, there will become a reliance on insurance to mitigate against unexpected costs during decommissioning. There is no margin for error here with assets that no longer produce an income.

Typical risks that may attach to a decommissioning project include: inappropriate disposal of hazardous materials (asbestos, oils, mercury), unsafe deconstruction leading to injury or property damage, leaking wells post-plugging leading to impacts to sea-life and environment and so on.

The insurance industry offers various evolving forms of cover including: decommissioning all risks insurance (for operators and contractors via the London market); and professional indemnity insurance (for the involved contractors). The products will evolve and, no doubt, adjusters will be called into action in the coming years to deal with the unexpected problems arise from decommissioning projects.

Avoiding a repeat of the Northern Endeavour
Australia’s offshore energy industry is expected to see an increasing number of projects and assets reach an end of their productive lives and move into a decommissioning phase over the next two decades, according to Keith John Pitt, minister for resources, water and Northern Australia.

Important elements of the federal government’s proposed enhanced framework to better protect Australian tax-payers include:

• Increased government scrutiny of title transfers;

• Greater assurances companies can meet their obligations; and

• The ability for the government to recall a previous owner to de­commissioning if required.

This is a strong signal previous owners and operators will be held to account to pay for their liabilities associated with the decommissioning of offshore assets.