Q&A: What disputes risks will flow from the decommissioning of high-carbon infrastructure?
Headlines in this article
The drive to deliver Net Zero will require high-carbon infrastructure to be decommissioned on an unprecedented scale. The process could cost in excess of USD200bn – and with the regulatory environment in constant flux, the potential for disputes is enormous.
What does decommissioning involve?
This process of taking existing offshore oil and gas facilities out of service comes with a host of technical, environmental and social risks.
If these are not managed correctly, the result is likely to be costly and complex disputes between stakeholders, in addition to the practical challenges of managing the decommissioning itself.
Safely and responsibly terminating the production and operation of offshore oil and gas facilities that are no longer economically viable, technically feasible, or environmentally acceptable will involve, among other things, plugging and abandoning wells, removing or reusing equipment and structures, restoring sites and seabeds, disposing of waste and hazardous materials, and monitoring and managing any residual impacts or liabilities.
It is difficult to conceptualise the scale of the decommissioning that will be required to deliver Net Zero. Industry analysts estimate the global cost will exceed USD200 billion in the coming decades, with around 2,000 offshore projects needing to be taken offline.
What sort of disputes can we expect?
Any change process on this scale will inevitably lead to risks and disputes. But the decarbonisation of the offshore oil and gas sector is likely to be particularly challenging for a number of reasons.
Offshore oil and gas facilities are spread across the world and are often in remote and/or contested territories.
This matters because the legal and regulatory frameworks governing the sector – including decommissioning obligations – vary massively across jurisdictions.
In addition, many of those frameworks are changing rapidly in response to the evolving climate agenda and the reluctance or inability of some participants to fulfil what governments consider to be their obligations.
The overarching legal frameworks described above also need to be applied in the context of contractual arrangements among relevant parties, such as joint operating agreements, production sharing contracts, service contracts, and decommissioning security agreements.
Existing contractual frameworks may not adequately address the allocation of risks and costs associated with the decommissioning process.
The continual evolution of the regulatory framework inevitably creates uncertainty and inconsistency in the interpretation and application of these rights and obligations.
While this can arise with all contractual counterparties (including joint venture (JV) partners and other contractors), it is particularly evident when national governments are involved because they often play a dual role in both establishing the regulatory framework and are also (via national oil companies) partners in the operations through production sharing contracts.
These complexities raise the risk that existing contractual frameworks may not adequately address the allocation of risks and costs associated with the decommissioning process.
This is particularly so because those contractual frameworks were often established years (or even decades) earlier, in the context of different legal and societal expectations.
Accordingly, the risk allocation in those contracts is often outdated and inconsistent with the new regulatory regimes. This may manifest itself in, for example, uncertainty as to who should bear the costs of decommissioning (particularly in circumstances where a JV partner has departed the tie-up or no longer has the financial capability to perform), or indeed even what the decommissioning process itself is to involve.
Any such inconsistency will again likely lead to a clash between both internally within the operators, and also with the relevant regulatory bodies.
Technical and operational challenges
The decommissioning of offshore oil and gas sector requires the use of innovative and sophisticated technologies (a topic we explore in more detail in a separate Q&A here).
Deploying these solutions, particularly in remote locations, is challenging from a technical and operational perspective, which may affect the delivery and quality of projects and services.
Such novel technologies are prone to (at best) delays, and (at worst) complete failure, and the ability to address any such issues is severely compromised by the fact that replacement parts, procedures, know-how or personnel cannot be easily accessed in those locations.
Furthermore, the decommissioning of offshore oil and gas assets involves complex and hazardous activities which pose significant risks of accidents, injuries, damages, and pollution, which in turn can result in litigation.
As explained above, the level of decommissioning required to deliver Net Zero is unprecedented. As a result there are likely to be shortages of contractors and equipment available to do the work, especially in deepwater and harsh environments.
This may make it difficult for operators and regulators to comply with their legal obligations and environmental standards, as well as for contractors and suppliers to meet the contractual and technical requirements of their clients.
The scarcity of capacity – and the uncertainty of demand (the rate at which decommissioning needs to happen will vary significantly depending on the path the world takes to Net Zero) may also lead to disputes over pricing, scheduling, liability, and performance, which would again likely result in delays and cost overruns.
Environmental and social impacts
Decommissioning in and of itself is a complex process that can give rise to breaches of environmental laws and regulations, non-compliance with environmental impact assessments and permits, and disputes with local communities and indigenous groups.
As projects come to the end of their useful lives, these matters are typically closely scrutinised to ensure any issues are addressed before the project is abandoned.
What can businesses do to manage risk?
Given the complexity and range of the dispute risks outlined above, stakeholders involved in the decommissioning of offshore oil and gas assets need to adopt a proactive and holistic approach to risk management and mitigation.
This will include conducting comprehensive due diligence and risk assessments of the legal, technical, environmental, and social aspects of the projects in advance, in an effort to provide adequate safeguards and remedies in case of disputes or other issues that arise.
It will also be important to engage in constructive dialogue and cooperation with the relevant stakeholders, and seek to align their interests and objectives at an early stage.