1 Submitted Via Regulations.gov August 28, 2023 The Honorable

Submitted Via Regulations.gov

August 28, 2023

The Honorable Debra Haaland,

Secretary of the U.S. Department of the Interior

Bureau of Ocean Energy Management,

Office of Regulations, Attn: Kelley Spence

45600 Woodland Road, Mailstop VAM-BOEM DIR,

Sterling, VA 20166, Room 5646, Washington, DC 20240

Re: Risk Management and Financial Assurance for OCS Lease and Grant Obligations

Docket ID: BOEM-2023-0027

RIN: 1010–AE14

Secretary Haaland,

The Sabin Center for Climate Change Law at Columbia Law School submits these

comments in response to the notice of proposed rulemaking (NPRM) issued by the Bureau of

Ocean Energy Management (BOEM) on June 29, 2023, entitled “Risk Management and Financial

Assurance for OCS Lease and Grant Obligations,” 88 Fed. Reg. 42136 (the “Proposed Rule”).

The Sabin Center, together with the Columbia Center on Sustainable Investment, will

shortly publish a ten-jurisdiction survey of decommissioning requirements for offshore upstream

oil and gas infrastructure (pre-publication draft attached).

The goal of this study was to provide

policymakers, civil society members, and industry participants with tools to protect the public

against the risk of private oil and gas companies, contractors, or investors (for simplicity, “oil

Martin Lockman, Martin Dietrich Brauch, Esteban F. Fresno Rodríguez, & José Luis Gallardo Torres,

Decommissioning Liability at the End of Offshore Oil and Gas: A Review of International Obligations, National

Laws, and Contractual Approaches in Ten Jurisdictions, SABIN CENTER FOR CLIMATE CHANGE LAW & COLUMBIA

CENTER ON SUSTAINABLE INVESTMENT (forthcoming August 2023) (attached).

companies”) defaulting on their decommissioning obligations in the face of the global climate

transition.

Based on this research, the Sabin Center supports regulations that increase the amount, and

quality, of collateral and financial assurance available to the federal government for

decommissioning activities. Moreover, the Sabin Center supports revisions that clarify and

streamline BOEM’s standards for supplemental bonding. The current supplemental bonding

standards consider a range of factors, including industry reference letters,

demonstrations of

“[b]usiness stability based on five years of continuous operation and production,”

financial

snapshots,

and the applicant’s “[r]ecord of compliance with laws, regulations, and lease terms.”

As BOEM correctly notes in the Proposed Rule, these factors are often irrelevant to, or poor

predictors of, a company’s likely ability to fulfil its decommissioning obligations.

However, BOEM’s financial assurance regime, as currently constructed and as envisioned

in the Proposed Rule, ignores the increasing likelihood of sector-wide climate-related

decommissioning events. Yet the global climate transition represents a significant systemic risk to

the oil industry. Faced with the increasingly dire impacts of global climate change, a large number

of countries, including the United States,

have made significant commitments to reduce GHG

See infra note 8 and accompanying text.

30 C.F.R. § 556.901(d)(1)(iv)(B).

30 C.F.R. § 556.901(d)(1)(iii).

30 C.F.R. § 556.901(d)(1)(i).

30 C.F.R. § 556.901(d)(1)(v).

Risk Management and Financial Assurance for OCS Lease and Grant Obligations, 88 Fed. Reg. 42136, 42142–43

(proposed June 29, 2023) (hereinafter “Proposed Rule”).

In 2021, the Biden administration pledged that the United States would “achieve an economy-wide target of

reducing its net greenhouse gas emissions by 50-52 percent below 2005 levels in 2030.” Nationally Determined

Contribution: Reducing Greenhouse Gases in the United States: A 2030 Emissions Target, United States of America

(Apr. 15, 2021), https://unfccc.int/sites/default/files/NDC/2022-

06/United%20States%20NDC%20April%2021%202021%20Final.pdf. While Congress has yet to enshrine binding

nation-wide emissions limits, federal agencies are already interpreting their statutory powers and obligations in light

of the nation’s Paris Agreement commitments. See, e.g., Corporate Average Fuel Economy Standards for Model

Years 2024-2026 Passenger Cars and Light Trucks, U.S. National Highway Traffic Safety Administration, 87 Fed.

Reg. 25710, 25984 (May 2, 2022) (noting that the National Highway Traffic Safety Administration’s authorizing

statute “permits—and arguably requires—that NHTSA consider how it can best coordinate its CAFE standards with

EPA’s GHG standards and the nation’s Paris Agreement commitments”).

emissions across their entire economies.

These commitments are a critical part of the broader

“climate transition” meant to curb global climate change and prepare our society for its impacts.

Increased public focus on GHGs, coupled with a global push for electrification and declining prices

for renewable energy, may cause a rapid decline in demand for fossil fuels or spur legal restrictions

on the extraction, use, and price of fossil fuels.

BOEM should anticipate such restrictions—the

Intergovernmental Panel on Climate Change projects that GHG emissions from existing and

planned fossil fuel infrastructure will push global warming past the Paris Agreement’s 1.5°C

threshold,

and more detailed projections estimate that “nearly 60 per cent of oil and fossil

methane gas . . . must remain unextracted to keep within a 1.5 °C carbon budget.”

Even without regulatory restrictions on fossil fuel consumption, global carbon taxes, or

other significant legal changes, the increasing adoption of renewable energy and energy-efficient

technologies may depress demand for fossil fuels.

A sector-wide decline in the oil and gas

industry, whether from sagging demand or legal restrictions on supply, could trigger a large-scale

“climate-related decommissioning event,” in which multiple offshore facilities reach the end of

their useful economic life at the same time that their owners face financial distress.

In light of the substantial risk that the climate transition poses to the oil and gas industry,

the Sabin Center is broadly supportive of BOEM’s efforts to protect the public from bearing

decommissioning costs by increasing the quantity and quality of decommissioning security

See Nationally Determined Contributions Registrary, UNITED NATIONS CLIMATE CHANGE (n.d.),

https://unfccc.int/NDCREG (registry containing nationally determined contributions from 195 nations).

Sini Matikainen & Eléonore Soubeyran, What are Stranded Assets? GRANTHAM RESEARCH INSTITUTE ON

CLIMATE CHANGE AND THE ENVIRONMENT 1 (July 27, 2022),

https://www.lse.ac.uk/granthaminstitute/explainers/what-are-stranded-assets/.

Sini Matikainen & Eléonore Soubeyran, What are Stranded Assets? GRANTHAM RESEARCH INSTITUTE ON

CLIMATE CHANGE AND THE ENVIRONMENT (July 22, 2022),

https://www.lse.ac.uk/granthaminstitute/explainers/what-are-stranded-assets/.

INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, SYNTHESIS REPORT OF THE IPCC SIXTH ASSESSMENT:

SUMMARY FOR POLICYMAKERS 48 (Mar. 19, 2023),

https://report.ipcc.ch/ar6syr/pdf/IPCC_AR6_SYR_LongerReport.pdf.

See Dan Welsby, James Price, Steve Pye, & Paul Ekins, Unextractable Fossil Fuels in a 1.5°C World, 597

NATURE 230 (Sept. 9, 2021), https://doi.org/10.1038/s41586-021-03821-8.

See Fabio Panetta, Member of the Executive Board, European Central Bank, Greener and Cheaper: Could the

Transition Away From Fossil Fuels Generate a Divine Coincidence? (Nov. 16, 2022), (transcript available at the

following link: https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp221116~c1d5160785.en.html)

(discussing “green innovation” as a source of demand pressure on fossil fuel producers).

provided by private oil and gas companies, contractors, or investors (for simplicity, “oil

companies”). We submit three comments intended to strengthen the Proposed Rule and reduce the

potential adverse impacts of the global climate transition on the American public:

• BOEM should broadly eliminate self-bonding for decommissioning obligations;

• BOEM should discount the value of proven reserves in any “Reserves-to-

Decommissioning Cost Ratio” to account for climate-related asset stranding; and

• BOEM should calculate supplemental financial assurance requirements based on the P90

decommissioning liability projection, or adopt a liability model that explicitly considers

sector-wide climate transition risk.

These points are further elaborated below.

1. To reduce risk from a large-scale climate-related decommissioning event, BOEM

should broadly eliminate self-bonding for decommissioning obligations.

The Proposed Rule contains significant revisions to BOEM’s criteria for determining

whether offshore oil companies will be required to provide supplemental financial assurance to

secure their decommissioning obligations.

To the extent that the Proposed Rule will increase the

amount of collateral available to the United States for offshore decommissioning expenses, the

Sabin Center supports this effort. However, BOEM should consider a broader categorical

restriction on “self-bonding” practices that allow oil companies to provide financial assurance in

an amount below their anticipated decommissioning expenses.

Fossil fuels produced from BOEM-managed leases contribute significantly to global climate change, and BOEM

may have a legal duty to more broadly restrict offshore fossil fuel development to minimize these harms. However,

the Sabin Center recognizes that the purpose of the Proposed Rule “is to ensure that taxpayers do not bear the cost of

meeting the obligations of lessees and grant holders on the OCS, particularly the costs of decommissioning that must

be met after the cash flow from production ceases.” Proposed Rule at 42142. The Sabin Center also acknowledges

that, on the day that the Proposed Rule was published, BOEM rejected a petition to initiate a rulemaking process to

reduce the rate of oil and gas production under the Outer Continental Shelf Lands Act of 1953. See Letter from

Laura Daniel-Davis, Principal Deputy Assistant Secretary of Land and Mineral Management, U.S. Department of

the Interior, to Ms. Randi Spivak, Public Land Program Director, Center for Biological Diversity, RE: Petition to

Reduce the Rate of Oil and Gas Production on Public Lands and Waters to Near Zero by 2035 (June 29, 2023)

(available at:

https://www.biologicaldiversity.org/programs/public_lands/energy/dirty_energy_development/oil_and_gas/pdfs/Cen

ter-rulemaking-oil-and-gas-petition-response--Jun-27-2023.pdf). In recognition of this restricted purpose, the Sabin

Center narrowly confines its comments to assessing the impact of the Proposed Rule on the anticipated ability of

lessees to satisfy their decommissioning obligations.

See Proposed Rule at 42141–42.

Self-bonding for environmental remediation has a long track record of failure in the face

of sector-wide declines. For example, the Surface Mining Control and Reclamation Act of 1977

(SMCRA) was intended to ensure that financial resources were available to reclaim mines at the

end of their commercial lives.

SMCRA requires mine operators to post financial assurance based

on the expected future cost of reclaiming their mined land, and authorized the coal mine regulator

of each State to “set its own criteria for acceptable forms of surety.”

However, in the wake of a

series of bankruptcies between 2015 and 2016 that impacted “nearly half of [the United States’]

coal production,”

U.S. regulators realized that self-bonding of decommissioning liability posed

significant and correlated default risks to host governments. In March of 2018, the Government

Accountability Office (GAO) conducted a review of financial assurances under SMCRA. Among

other shortcomings, the GAO’s report found that regulators often struggle to replace SMCRA self-

bonding with other financial assurances, because “[i]f an operator no longer qualifies for self-

bonding,” requiring the company to post additional collateral “could lead to a worsening of the

operator’s financial condition, which could make it less likely that the operator will successfully

reclaim the site.”

The GAO noted that industrywide bankruptcies and difficulties with securing

bonds from near-bankrupt companies led the Bureau of Land Management “to implement

regulations in 2001 eliminating the use of self-bonding for hardrock mining.”

The GAO’s review

ultimately recommended that Congress consider eliminating SMCRA’s self-bonding provisions.

BOEM itself has acknowledged that its self-bonding regulations create a significant risk to

taxpayers when the oil industry faces systemic precarity. During “the oil price collapse of 2014–

2016,” for example, BOEM recognized that a number of oil companies had provided inadequate

financial assurance, but “did not fully enforce” existing financial assurance requirements because

the Bureau “was concerned that fully enforcing [the standard] would have led to an increase of

Denise A. Dragoo & James P. Allen, Coal Mine Closure, Reclamation and Financial Assurance, ROCKY

MOUNTAIN MINERAL LAW FOUNDATION PAPER NO. 7 (Nov. 5-6, 2009).

Id.

Mark Olalde, U.S. Coal Hasn’t Set Aside Enough Money to Clean up its Mines, CLIMATE HOME NEWS (Mar. 14,

2018), https://www.climatechangenews.com/2018/03/14/us-coal-hasnt-set-aside-enough-money-clean-mines/.

U.S. Gov't Accountability Off., GAO-18-305, Coal Mine Reclamation: Federal and State Agencies Face

Challenges in Managing Billions in Financial Assurances 21 (2018).

Id. at 23–24.

Id. at 27.

bond demands that, in turn, would have contributed to an increase in bankruptcy filings.”

However, the NPRM accompanying the Proposed Rule provides no justification for BOEM’s

continued acceptance of self-bonding.

Given BOEM’s longstanding recognition of the risks caused by self-bonding, and the

systemic precarity that the climate transition creates for the oil industry, BOEM should consider

an alternative to the Proposed Rule that would phase out self-bonding. While the statutory text of

SMCRA requires the Department of the Interior to allow self-bonding under certain

circumstances,

BOEM’s regulatory authority over offshore leasing is much broader.

The Sabin

Center urges BOEM to eliminate any provisions that allow oil companies to self-bond, and to

instead adopt regulations that require all oil companies to provide enough financial assurance to

secure their anticipated decommissioning obligations.

2. To reduce risk from a large-scale climate-related decommissioning event, BOEM

should discount the value of proven reserves in any “Reserves-to-Decommissioning

Cost Ratio” to account for climate-related asset stranding.

The Proposed Rule would waive supplemental financial assurance requirements for leases

if “[t]here are proved oil and gas reserves on the lease . . . the value of which exceeds three times

the estimated cost of the decommissioning associated with the production of those reserves.”

the NPRM accompanying the Proposed Rule, BOEM requested comments “on whether this is an

appropriate threshold, or if there are better approaches and/or data sets available for that would

provide BOEM with better certainty that taxpayer interests will ultimately be protected.”

As an initial comment, the Sabin Center notes that the Proposed Rule exposes the American

public to significant directional risk. Decommissioning security becomes relevant only where an

Notice of Proposed Rulemaking on Risk Management, Financial Assurance and Loss Prevention, 85 Fed. Reg.

65,904, 65,906 (Oct. 16, 2020), https://www.boem.gov/sites/default/files/documents/about-boem/regulations-

guidance/federal-register/proposed-rules/85-FR-65904.pdf.

See, e.g., 30 U.S.C. § 1259(c).

In fact, the Outer Continental Shelf Leasing Act places relatively few statutory conditions around bonding. In

assessing its statutory authority to set decommissioning bonding requirements, BOEM points only to 43 U.S.C.

1338a, which “reflects Congress’ intent to authorize BOEM to collect financial assurance.” Proposed Rule at 42183.

Proposed Rule at 42172 (to be codified at 30 C.F.R. § 556.901(d)(4)).

Proposed Rule at 42148.

oil company defaults on its decommissioning obligations. The NPRM assumes that in the event of

bankruptcy another oil company will buy the lease, assume the existing oil company’s

decommissioning obligations, and recoup its investment by extracting and selling the proven oil

reserves.

However, as BOEM recognized in a 2020 rulemaking, oil company bankruptcies may

be driven by a decline in the value of oil that simultaneously reduces the value of that company’s

proven reserves.

Put simply, the proven oil reserves that BOEM looks to in lieu of security are

likely to lose value exactly when BOEM must rely on the value of those assets to pay for (or

persuade another oil company to pay for) decommissioning expenses.

The Proposed Rule does not entirely ignore this directional risk. In justifying the Proposed

Rule’s three-to-one ratio, as opposed to a lower ratio, BOEM correctly notes that oil and gas prices

can be volatile, and that broad systemic factors like “macro-economic conditions” may reduce a

lease’s “commercial appeal.”

However, the NPRM accompanying the Proposed Rule does not

address whether these factors should caution against adopting a Reserves-to-Decommissioning

Cost Ratio at all.

In addition, the Proposed Rule adopts a valuation methodology based on techniques

developed by the Security and Exchange Commission (SEC) for reporting the value of proven oil

and gas reserves.

This methodology is poorly suited for BOEM’s purposes. Given the scope and

scale of global climate action,

the value of unextracted fossil fuels may be impaired by market

forces, by regulatory action in the United States or other jurisdictions, or by civil liability

associated with their use. While the costs of future impairments will eventually be incorporated

into valuations of proven oil and gas reserves, the SEC’s valuation methodology specifically

examines “prices and costs under existing economic conditions.”

This methodology might be

adequate for the purposes of real-time SEC disclosures, but BOEM is explicitly using this

See id.

Notice of Proposed Rulemaking on Risk Management, Financial Assurance and Loss Prevention, 85 Fed. Reg.

65,904, 65,914 (Oct. 16, 2020), https://www.boem.gov/sites/default/files/documents/about-boem/regulations-

guidance/federal-register/proposed-rules/85-FR-65904.pdf.

Id.

See Proposed Rule at 42172 (to be codified at 30 C.F.R. § 556.901(d)(4)) (citing 17 CFR §§ 210.4–10, 229.1200).

See supra Note 9 and accompanying text.

17 C.F.R. § 229.1202(a)(2) (2023).

valuation to anticipate the future value of assets in the event of an oil company bankruptcy. These

are significantly different circumstances.

If BOEM retains a Reserves-to-Decommissioning Cost Ratio exemption in any final rule,

BOEM should adopt a forward-looking methodology that considers the risks associated with a

large-scale climate-related decommissioning event. One way to approach this challenge would be

to calculate the value of proven oil reserves based on a scenario where oil companies are forced,

by mechanisms like carbon taxes or civil litigation, to incorporate the externalities of emissions

associated with their products. Under this scenario, a Reserves-to-Decommissioning Cost Ratio

exemption would exempt oil companies from providing supplemental financial assurance if:

(1) the value of their proven oil reserves under current economic conditions; minus

(2) the externalities associated with the GHGs embedded in their proven reserves; is

greater than or equal to

(3) three times the oil company’s estimated decommissioning costs.

To estimate the climate-related costs associated with GHG emissions, BOEM could look

to the National Environmental Policy Act Guidance on Consideration of Greenhouse Gas

Emissions and Climate Change (the “Guidance”) issued by the U.S. Council on Environmental

Quality (CEQ) in January 2023. Among other considerations, CEQ’s Guidance recommends that

agencies assess the impact of proposed federal actions based on “the best available [SC-GHG]

estimates . . . to translate climate impacts into the more accessible metric of dollars, allow decision

makers and the public to make comparisons, help evaluate the significance of an action’s climate

change effects, and better understand the tradeoffs associated with an action and its alternatives.”

SC-GHG metrics have repeatedly been upheld by courts as a valid method of assessing the climate

impact of proposed federal actions.

National Environmental Policy Act Guidance on Consideration of Greenhouse Gas Emissions and Climate

Change, U.S. Council on Environmental Quality, 88 Fed. Reg. 1196, 1198 (Jan. 9, 2023).

See, e.g., Zero Zone, Inc. v. United States Dep’t of Energy, 832 F.3d 654 (7th Cir. 2016); Montana Env’t Info.

Ctr. v. U.S. Off. of Surface Mining, 274 F. Supp. 3d 1074 (D. Mont. 2017), amended in part, adhered to in part sub

nom. Montana Env't Info. Ctr. v. United States Off. of Surface Mining, No. CV 15-106-M-DWM, 2017 WL

5047901 (D. Mont. Nov. 3, 2017); High Country Conservation Advocs. v. United States Forest Serv., 52 F. Supp. 3d

1174 (D. Colo. 2014); WildEarth Guardians v. Zinke, No. CV 17-80-BLG-SPW-TJC, 2019 WL 2404860 (D. Mont.

Feb. 11, 2019), report and recommendation adopted sub nom. WildEarth Guardians v. Bernhardt, No. CV 17-80-

BLG-SPW, 2021 WL 363955 (D. Mont. Feb. 3, 2021).

In discounting the value of proven oil and gas reserves, BOEM may reasonably choose to

adopt a different pricing model than SC-GHG. SC-GHG is not specifically designed to estimate

future fossil fuel prices, and there is no guarantee that the climate transition will force oil

companies to fully internalize the costs of their products’ emissions. However, SC-GHG provides

an accepted model for discounting the costs associated with GHG emissions, and one that is no

less precise than the broad three-to-one ratio incorporated into the Proposed Rule. Whatever

valuation model BOEM chooses, BOEM should ensure that any asset value test it adopts is based

on a realistic estimate of the future value of assets, rather than prices under “existing economic

conditions.”

3. To reduce risk from a large-scale climate-related decommissioning event, BOEM

should calculate supplemental financial assurance requirements based on the P90

decommissioning liability projection, or adopt a liability model that explicitly

considers sector-wide climate transition risk.

In the NPRM accompanying the Proposed Rule, BOEM requested comments on “the costs

and benefits of setting the supplemental financial assurance requirements based on each of the

P50, P70, and P90 decommissioning liability levels,” and in particular on “impacts to potential

taxpayer liability” from decommissioning liability calculations.

The Sabin Center recommends

that BOEM should either (1) revise the Proposed Rule to use the most conservative cost estimates

produced by the Bureau of Safety and Environmental Enforcement (BSEE)—the P90 projections;

or (2) revise the Proposed Rule to use a cost model that explicitly considers sector-wide climate

transition-driven demand risk.

The Bureau of Safety and Environmental Enforcement (BSEE) has long recognized that

decommissioning cost estimates can be affected by industry-wide decommissioning trends. A

2017 white paper commissioned by BSEE emphasized that “demand impacts,” like the increases

in decommissioning following BOEM’s “Idle Iron” Notice to Lessees (NTL No. 2010) or currently

projected increases in global demand for decommissioning services, “may put upward pressure on

See 17 C.F.R. § 229.1202(a)(2) (2023).

Proposed Rule at 42144.

decommissioning costs.”

However, BSEE’s long-term pricing studies have excluded potentially

significant factors like “[l]ong term shifts in energy patterns such as . . . reduced demand for fossil

fuels due to widespread adoption of electric vehicles or increased renewable energy production.”

Instead, BSEE has increasingly relied on historical data from U.S. offshore facilities.

Yet the

factors that BSEE excludes remain relevant to the decommissioning landscape. Electric vehicle

sales, for instance, have increased by a factor of 12 since BSEE published its white paper on

probabilistic modelling in 2017.

Unless and until the probabilistic estimates generated by BSEE explicitly consider the

demand impact of the climate transition, they will systemically underestimate decommissioning

costs in the event of a large-scale climate-related decommissioning event. Given this

acknowledged but unaccounted-for risk, BOEM should either (1) revise the Proposed Rule to use

BSEE’s most conservative cost estimates—the P90 projections; or (2) revise the Proposed Rule to

use another cost model that explicitly considers sector-wide demand risks posed by the climate

transition.

4. Conclusion

The Sabin Center supports efforts to increase the amount, and quality, of collateral and

financial assurance available to the federal government for fossil fuel decommissioning activities.

Moreover, the Sabin Center supports revisions that clarify and streamline BOEM’s standards for

supplemental bonding. In light of these considerations, the Sabin Center welcomes BOEM’s

current rulemaking process.

However, BOEM’s financial assurance regime, as currently constructed and as envisioned

in the Proposed Rule, fails to account for the increasing likelihood of sector-wide climate-related

decommissioning events. To reduce the risk that these events pose to the American public, BOEM

ICF INTERNATIONAL, INC. & TSB OFFSHORE, INC IN COLLABORATION WITH THE BUREAU OF SAFETY AND

ENVIRONMENTAL ENFORCEMENT, DECOMMISSIONING METHODOLOGY AND COST EVALUATION § 10-3 (2017),

https://www.bsee.gov/sites/bsee.gov/files/tap-technical-assessment-program/738aa.pdf.

Id. § 10-8.

See Proposed Rule at 42143 (describing BSEE’s probabilistic modelling process and reliance on industry

decommissioning reports provided pursuant to NTL 2016-N03).

Electric Vehicles, INTERNATIONAL ENERGY AGENCY (July 11, 2023), https://www.iea.org/energy-

system/transport/electric-vehicles.

should broadly eliminate self-bonding for decommissioning obligations. In the absence of such a

change, BOEM should discount the value of proven reserves in any “Reserves-to-

Decommissioning Cost Ratio” to account for climate-related asset stranding, and adopt stringent

estimates of decommissioning liability that explicitly consider sector-wide climate transition risk.

The modifications suggested in this comment letter would make the Proposed Rule more

consistent with the Biden Administration’s stated intent “to organize and deploy the full capacity

of its agencies to combat the climate crisis to implement a Government-wide approach that . . .

increases resilience to the impacts of climate change [and] conserves our lands, waters, and

biodiversity.”

Moreover, they are consistent with the longstanding goals of BOEM’s financial

assurance regulations. Congress has authorized BOEM to collect financial assurance from offshore

oil companies,

and under that authority BOEM has developed a comprehensive system of

regulations with the laudable goal of ensuring that these companies do not pass the costs of their

decommissioning obligations on to the public.

Faced with the economy-wide impacts of global

climate change, BOEM must modify this system to protect the public from climate-related

decommissioning events.

Sincerely,

Martin Lockman

Climate Law Fellow, Sabin Center for Climate Change Law

Associate Research Scholar, Columbia Law School

m.loc[email protected]

Tackling the Climate Crisis at Home and Abroad, Exec. Order No. 14008, 86 Fed. Reg. 7619, 7622 (Jan. 27,

2021).

43 U.S.C. § 1338a.

Proposed Rule at 42140.

DECOMMISSIONING LIABILITY AT THE

END OF OFFSHORE OIL AND GAS:

A Review of International Obligations,

National Laws, and Contractual

Approaches in Ten Jurisdictions

By Martin Lockman, Martin Dietrich Brauch, Esteban F.

Fresno Rodríguez, and José Luis Gallardo Torres

Prepublication Draft: August 2023

Columbia Law School

The Sabin Center for Climate Change Law develops legal techniques to fight climate change,

trains law students and lawyers in their use, and provides the legal profession and the public

with up-to-date resources on key topics in climate law and regulation. It works closely with the

scientists at Columbia University's Earth Institute and with a wide range of governmental, non-

governmental and academic organizations.

Sabin Center for Climate Change Law

Columbia Law School

435 West 116

Street

New York, NY 10027

Tel: +1 (212) 854-3287

Email: columbia[email protected]

Web: http://www.ColumbiaClimateLaw.com

X: @ColumbiaClimate

Blog: http://blogs.law.columbia.edu/climatechange

The Columbia Center on Sustainable Investment, a joint Center of Columbia Law School and

Columbia Climate School, is an applied research center that works to develop critical

understanding, practical approaches, and governance tools for governments, investors,

communities, and other stakeholders to maximize the benefits and minimize the potential harms

of international investment for sustainable development.

Columbia Center on Sustainable Investment (CCSI)

Jerome Greene Hall

435 West 116

Street

New York, NY 10027

Tel: +1 (212) 854-1830

Email: [email protected]

Web: http://ccsi.columbia.edu

X: @CCSI_Columbia

Blog: https://ccsi.columbia.edu/content/blog

Disclaimer: This paper is the responsibility of the Sabin Center for Climate Change Law and the Columbia

Center on Sustainable Investment alone, and does not reflect the views of Columbia Law School or

Columbia University. Although the Institute for Energy Economics and Financial Analysis (IEEFA)

commissioned this report and IEEFA provided comments on a draft, the Sabin Center for Climate Change

Law and the Columbia Center on Sustainable Investment are responsible for the final contents. This paper

is an academic study provided for informational purposes only and does not constitute legal advice.

Transmission of the information is not intended to create, and the receipt does not constitute, an attorney-

client relationship between sender and receiver. No party should act or rely on any information contained

in this White Paper without first seeking the advice of an attorney.

About the authors:

Martin Lockman is a Climate Law Fellow and Associate Research Scholar at Columbia

Law School’s Sabin Center for Climate Change Law.

Martin Dietrich Brauch is a Lead Researcher and Associate Research Scholar at the

Columbia Center on Sustainable Investment.

Esteban F. Fresno Rodríguez was a Spring/Summer 2023 Research Assistant at the

Columbia Center on Sustainable Investment.

José Luis Gallardo Torres was a Fall 2022 Research Assistant at the Columbia Center on

Sustainable Investment.

Acknowledgements: The authors would like to thank the Institute for Energy Economics and

Financial Analysis (IEEFA) for commissioning and supporting this study and for providing

comments on a draft. The Sabin Center for Climate Change Law and the Columbia Center on

Sustainable Investment are responsible for the final contents. In addition, the authors would like

to thank Dylan Shamoon, Samar Rizvi, and Duoye Xu for their research support in the early

stages of this project.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

EXECUTIVE SUMMARY

Offshore oil and gas infrastructure faces an existential threat: the increasing exigency of

climate change. The Intergovernmental Panel on Climate Change projects that GHG emissions from

existing and planned fossil fuel infrastructure will push global warming past the Paris Agreement’s

1.5°C threshold,

and more detailed projections estimate that “nearly 60 per cent of oil and fossil

methane gas . . . must remain unextracted to keep within a 1.5 °C carbon budget.”

The growing

urgency of climate action, coupled with the increasing adoption of renewable energy systems and

energy-efficient technologies, may strand thousands of offshore oil and gas installations across the

globe.

This paper provides an overview of the statutory, regulatory, and contractual regimes

governing offshore oil and gas decommissioning in ten countries, and qualitatively identifies key

financial and environmental risks that might arise in a “rapid phase-out” scenario presented by the

energy transition.

In doing so, it highlights areas in which these regimes may create risks in a rapid

phase-out scenario involving the widespread cessation of offshore oil and gas activities. The first

part of this paper provides a high-level overview of the legal and economic structures that govern

offshore oil and gas decommissioning, highlights gaps and risks that are presented by a rapid phase-

out scenario, and presents recommendations for policymakers, academics, and industry participants

to reform decommissioning laws in the face of the climate-driven energy transition. The second part,

Appendices 1 through 10, provides overviews of the laws, regulations, and contracts governing

INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, SYNTHESIS REPORT OF THE IPCC SIXTH ASSESSMENT: SUMMARY FOR

POLICYMAKERS 48 (Mar. 19, 2023), https://report.ipcc.ch/ar6syr/pdf/IPCC_AR6_SYR_LongerReport.pdf.

See Dan Welsby, James Price, Steve Pye, & Paul Ekins, Unextractable Fossil Fuels in a 1.5°C World, 597 NATURE 230 (Sept.

9, 2021), https://doi.org/10.1038/s41586-021-03821-8.

See infra Section 1: “Introduction.”

For the purposes of this paper, a “rapid phase-out” scenario refers to a scenario in which offshore hydrocarbon assets

suffer either “economic stranding” from a change in the price of oil or cost of extraction or “regulatory stranding” from

legal restrictions on offshore exploration or oil and gas products. See Stranded Assets, CARBON TRACKER INITIATIVE (Aug.

23, 2017), https://carbontracker.org/terms/stranded-assets/.

This paper is general, and does not attempt to quantify stranded offshore assets within any particular field or

jurisdiction. However, studies of regional fossil fuel reserves have suggested that, in a transition scenario compatible

with the Paris Agreement’s goal of limiting end-of-century global warming to 1.5°C, by 2050 up to 83% of oil reserves in

some jurisdictions may be unextractable. Dan Welsby, James Price, Steve Pye, & Paul Ekins, Unextractable Fossil Fuels in a

1.5°C World, 597 NATURE 230, 233 (Sept. 9, 2021), https://doi.org/10.1038/s41586-021-03821-8.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

decommissioning in ten major oil- and gas-producing jurisdictions: Angola, Australia, Brazil,

Indonesia, Malaysia, Mexico, Nigeria, Norway, the United Kingdom, and the United States.

The potential rapid decline in offshore oil and gas is a matter of public concern because

governments often sit as the “decommissioner of last resort.”

Most countries with significant

offshore oil and gas resources have laws, regulations, and contracts that require private offshore oil

and gas companies, contractors, or investors (for simplicity, “oil companies”) to bear the cost of

decommissioning their facilities.

A formal assignment of legal liability, however, does not

guarantee that decommissioning will occur or that funds will be available when decommissioning

obligations arise. Even jurisdictions with extensive decommissioning experience and well-tested

decommissioning regulations may be unprepared for the industry-wide decline associated with a

rapid phase-out of offshore oil and gas production.

To protect the public in a rapid phase-out scenario, and to ensure that fossil fuel companies

meet their decommissioning obligations, governments, policymakers, and industry participants

must take four key steps:

1. Create and regularly update comprehensive decommissioning plans. Some jurisdictions

prepare decommissioning plans only when an installation or field is approaching the end of

its usable life.

This approach may create bottlenecks and unnecessary delays in a rapid

phase-out scenario, where offshore facilities may need to be quickly decommissioned long

This overview was assembled through a review of English-language legal resources. These include academic and

industry literature, along with government-produced primary sources or, where available, authoritative translations of

those sources. However, offshore oil exploration is a politically and economically significant activity in each of the

covered jurisdictions, and many jurisdictions have new or quickly evolving legal regimes. In addition, offshore oil

installations have long lifespans, and the permits of specific existing installations may be issued under, and governed by,

previous regulations, rules, or standards. While all efforts were made to ensure that these overviews are accurate,

current, and broadly applicable, the authors caution against using this paper as the primary tool to assess legal duties

with respect to any specific offshore installation.

See CONSULTATION ON ESTABLISHING THE OFFSHORE DECOMMISSIONING REGIME FOR CO2 TRANSPORT AND STORAGE

NETWORKS 36, U.K. DEPARTMENT FOR BUSINESS, ENERGY & INDUSTRIAL STRATEGY (Aug. 2021),

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1007773/ccus-

decommissioning-consultation.pdf (describing the United Kingdom as a “decommissioner of last resort” when private

actors have failed”).

Annie Leeks, Steven Smith, Sylvia Tonova, & David Wallach, Offshore Oil And Gas Field Decommissioning: Disputes And

Other Challenges, MONDAQ (Oct. 23, 2021), https://www.mondaq.com/unitedstates/oil-gas-electricity/1123876/offshore-oil-

and-gas-field-decommissioning-disputes-and-other-challenges.

See infra Section 5.1: “Gaps, Risks, and Areas for Exploration: Responsibility for Decommissioning.”

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

iii

before the ends of their previously anticipated lifespans. To prepare for a rapid phase-out,

governments should require the operators of all offshore oil and gas facilities to create and

regularly update comprehensive decommissioning plans.

2. Reexamine decommissioning security mechanisms. Legal mechanisms like collateral

packages, guarantees, and funding structures are often predicated on assumptions that oil

and gas assets will remain valuable and that oil companies will remain solvent. In the face of

the transition away from fossil fuels, these assumptions may be incorrect.

Policymakers and

industry participants should examine these mechanisms to ensure that they are compatible

with a rapid phase-out scenario, paying particular attention to three security mechanisms:

a. Guarantees, insurance, self-insurance, and third-party pledges provided by entities

that are heavily exposed to the oil and gas industry may be particularly vulnerable to

the systemic devaluation of oil and gas assets.

b. Collateral packages that depend on the value of concession agreements or

unextracted fossil fuel assets may lose value in a field-wide rapid phase-out.

c. Decommissioning funds that are funded gradually over the course of an asset’s

anticipated life may be underfunded if assets are decommissioned early.

3. Evaluate and plan for the tax consequences of industry-wide decommissioning. Offshore

decommissioning is an expensive obligation that occurs at the end of a facility’s economic

life, and may significantly affect the economics of decommissioning a particular facility.

Policymakers and industry participants who are planning for decommissioning

expenditures should ensure that they are aware of, and prepared for, the tax implications of

a rapid phase-out affecting the entire oil and gas industry.

4. Evaluate and modify stabilization clauses to accommodate a rapid phase-out. In evaluating

their policies, governments should be aware that stabilization clauses in investor-state oil

and gas contracts may shift or create additional burdens around early offshore

decommissioning.

Governments should consider modifying stabilization clauses in line

with international best practices to allow them to mandate early decommissioning if offshore

See infra Section 5.3: “Gaps, Risks, and Areas for Exploration: Guarantee, Bonding, and Security Arrangements.”

See infra Section 4.3: “Tax Treatment of Decommissioning.”

See infra Section 5.5: “Gaps, Risks, and Areas for Exploration: Stabilization Clauses.”

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

assets become legally impaired or otherwise “stranded” by the transition away from fossil

fuels.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas 
 
Sabin Center for Climate Change Law | Columbia Law School 
v 
 
CONTENTS 
 Introduction ........................................................................................................................................... 1 
 Sources of Law Governing Decommissioning Obligations ................................................... 5 
1  International Law ............................................................................................................................... 5 
1.1  Major Multilateral Treaties ........................................................................................................ 5 
1.2  IMO Guidelines and Regional Conventions ........................................................................... 9 
2  National and Subnational Law ....................................................................................................... 13 
3  Contracts ............................................................................................................................................ 14 
 Liability for Decommissioning .............................................................................................. 17 
1  Responsibility for Decommissioning ............................................................................................ 17 
1.1  Owner/Operator Liability ........................................................................................................ 17 
1.2  “Trailing Liability” ................................................................................................................... 18 
1.3  Government Liability ............................................................................................................... 19 
1.4  Decommissioning Provisions.................................................................................................. 20 
1.5  Post-Decommissioning Liability ............................................................................................ 21 
 Financing Decommissioning ................................................................................................. 22 
1  Decommissioning Funding Structures .......................................................................................... 22 
1.1  Pay-as-you-go ............................................................................................................................ 22 
1.2  Designated Fund ....................................................................................................................... 23 
2  Guarantee, Bonding, and Security Arrangements ...................................................................... 23 
2.1  Self-Insurance and Asset Pledges ........................................................................................... 24 
2.2  Third-Party Guarantees ........................................................................................................... 24 
2.3  Designated Funds ..................................................................................................................... 26 
1  Tax Treatment of Decommissioning.............................................................................................. 27 
1.1  Deduction of Decommissioning Costs .................................................................................. 28 
1.2  End-of-Life Tax Liabilities ....................................................................................................... 30 
1.3  Tax Stabilization in Contracts ................................................................................................. 31 
 Gaps, Risks, and Areas for Exploration ................................................................................. 31 
1  Responsibility for Decommissioning ............................................................................................ 32 
2  Decommissioning Funding Structures .......................................................................................... 32 
3  Guarantee, Bonding, and Security Arrangements ...................................................................... 33 
3.1  Self-Insurance and Collateral Risk ......................................................................................... 33 
3.2  Correlated Guarantee Risk ...................................................................................................... 36 
4  Tax Treatment of Decommissioning.............................................................................................. 37 
5  Stabilization Clauses ........................................................................................................................ 38 
 Conclusion and Recommendations ....................................................................................... 39 
 Appendix 1: Angola ................................................................................................................ 42 
 Appendix 2: Australia ............................................................................................................ 51 
 Appendix 3: Brazil .................................................................................................................. 60 
 Appendix 4: Indonesia ........................................................................................................... 68 
 Appendix 5: Malaysia ............................................................................................................. 76 
 Appendix 6: Mexico ................................................................................................................ 82 
 Appendix 7: Nigeria ............................................................................................................... 90 
 Appendix 8: Norway .............................................................................................................. 97 
 Appendix 9: United Kingdom .............................................................................................. 102 
 Appendix 10: United States .................................................................................................. 110 
 

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

1. INTRODUCTION

In 1897, the first offshore oil well was drilled “at the end of a wharf, 300 feet off the coast of

Summerland, California.”

Today, more than 12,000 offshore oil and gas installations straddle the

globe,

from the Perdido spar moored in 8,000-foot deep water off the Gulf of Mexico

to the 200,000

ton Berkut oil platform on the east coast of Russia.

Industry analysists anticipate annual offshore

oil and gas investments to reach USD 173 billion by 2024.

A number of oil and gas companies are

expected to significantly expand their offshore drilling activities in the coming years.

At the same

time, many jurisdictions face a growing need to decommission their offshore oil and gas

infrastructure, whether because the infrastructure is aging, the resources are depleted, or net-zero

strategies require certain producing assets to be decommissioned earlier than expected. A 2021

forecast by IHS Markit estimated that global offshore decommissioning spending could cost nearly

USD 100 billion between 2021 and 2030, a period that S&P Global Commodity Insights has described

as a potential “decade of offshore decommissioning.”

In the face of increasing demand for

decommissioning, some have predicted that decommissioning costs may increase significantly.

Offshore oil and gas infrastructure also faces an existential threat: the increasing exigency of

climate change. the Intergovernmental Panel on Climate Change projects that GHG emissions from

Offshore Oil and Gas: Offshore Drilling, (Oct. 4, 2022), https://www.eia.gov/energyexplained/oil-and-petroleum-

products/offshore-oil-and-gas-in-depth.php.

Isabelle Gerretsen, The New Use for Abandoned Oil Rigs, BBC (Jan. 26, 2021),

https://www.bbc.com/future/article/20210126-the-richest-human-made-marine-habitats-in-the-world.

Perdido, SHELL (n.d.), https://www.shell.com/about-us/major-projects/perdido.html.

Tim Newcomb, 7 of the World’s Biggest and Baddest Offshore Structures, POPULAR MECHANICS (Jan. 22, 2017),

https://www.popularmechanics.com/technology/infrastructure/g2926/7-of-the-biggest-offshore-structures/.

Rod Nickel & Sabrina Valle, This Decade’s Oil Boom is Moving Offshore—Way Offshore, REUTERS (Aug. 31, 2022),

https://www.reuters.com/business/energy/this-decades-oil-boom-is-moving-offshore-way-offshore-2022-08-31/.

Benjamin Storrow, Offshore Oil is About to Surge, E&E CLIMATEWIRE (Mar. 22, 2023),

https://www.eenews.net/articles/offshore-oil-is-about-to-surge/ (reporting on industry estimates that “offshore spending

will eclipse $100 billion in 2023 and 2024”).

Christian de los Reyes Ullevik, Are We Entering a Decade of Offshore Decommissioning?, S&P GLOBAL COMMODITY INSIGHTS

(Oct. 5, 2021), https://www.spglobal.com/commodityinsights/en/ci/research-analysis/decade-of-offshore-

decommissioning.html.

Andrew Reid, Offshore Energy: Are Decommissioning Costs Set to Spiral?, OFFSHORE ENGINEER (Mar. 1, 2022),

https://www.oedigital.com/news/494667-offshore-energy-are-decommissioning-costs-set-to-spiral.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

existing and planned fossil fuel infrastructure will push global warming past the Paris Agreement’s

1.5°C threshold,

and more detailed projections estimate that “nearly 60 per cent of oil and fossil

methane gas . . . must remain unextracted to keep within a 1.5 °C carbon budget.”

Increased public

focus on greenhouse gas emissions, coupled with the global push for electrification and declining

prices for renewable energy, may cause a rapid decline in oil and gas demand that forces the mass

closure of offshore installations.

Even without policy changes or concerted climate action, the

increasing adoption of renewable energy systems and energy-efficient technologies is likely to

depress demand for fossil fuels.

The potential rapid decline in offshore oil and gas is a matter of public concern because

governments often sit as the “decommissioner of last resort.”

Most countries are parties to treaties

that require them to remove abandoned offshore infrastructure and take other measures to avoid

oceanic pollution.

Even without international pressure, coastal states have a national interest in

protecting their waters from environmental hazards like abandoned oil and gas facilities. For this

reason, most countries with significant offshore oil and gas resources have laws, regulations, and

contracts that require private offshore oil companies to bear the cost of decommissioning their

facilities.

A formal assignment of legal liability, however, does not guarantee that

decommissioning will occur or that funds will be available when decommissioning obligations arise.

INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, SYNTHESIS REPORT OF THE IPCC SIXTH ASSESSMENT: SUMMARY FOR

POLICYMAKERS 48 (Mar. 19, 2023), https://report.ipcc.ch/ar6syr/pdf/IPCC_AR6_SYR_LongerReport.pdf.

See Dan Welsby, James Price, Steve Pye, & Paul Ekins, Unextractable Fossil Fuels in a 1.5°C World, 597 NATURE 230 (Sept.

9, 2021), https://doi.org/10.1038/s41586-021-03821-8.

Sini Matikainen & Eléonore Soubeyran, What are Stranded Assets? GRANTHAM RESEARCH INSTITUTE ON CLIMATE CHANGE

AND THE ENVIRONMENT (July 22, 2022), https://www.lse.ac.uk/granthaminstitute/explainers/what-are-stranded-assets/.

See Fabio Panetta, Member of the Executive Board of the ECB, Italian Banking Association (Nov. 16, 2022), (transcript

available at the following link: https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp221116~c1d5160785.en.html

(discussing “green innovation” as a source of demand pressure on fossil fuel producers).

See CONSULTATION ON ESTABLISHING THE OFFSHORE DECOMMISSIONING REGIME FOR CO2 TRANSPORT AND STORAGE

NETWORKS 36, U.K. DEPARTMENT FOR BUSINESS, ENERGY & INDUSTRIAL STRATEGY (Aug. 2021),

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1007773/ccus-

decommissioning-consultation.pdf (describing the United Kingdom as a “decommissioner of last resort” when private

actors have failed”).

See infra Section 2.1: “International Law.”

Annie Leeks, Steven Smith, Sylvia Tonova, & David Wallach, Offshore Oil And Gas Field Decommissioning: Disputes And

Other Challenges, MONDAQ (Oct. 23, 2021), https://www.mondaq.com/unitedstates/oil-gas-electricity/1123876/offshore-oil-

and-gas-field-decommissioning-disputes-and-other-challenges.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

This paper provides an overview of statutory, regulatory, and contractual

regimes

governing liability for decommissioning of offshore oil and gas infrastructure to highlight areas in

which these regimes may create risks in a “rapid phase-out” scenario involving the widespread

cessation of offshore oil and gas activities. The challenges posed by oil and gas decommissioning are

not novel. While some jurisdictions like Brazil have conducted relatively little offshore

decommissioning,

others like the United States have decades of experience decommissioning

deepwater installations.

A large body of academic, industry, and government research addresses

the legal and economic mechanisms underlying offshore decommissioning. However, little research

focuses on the risks that these mechanisms create in a rapid phase-out scenario, where offshore oil

and gas assets are rapidly stranded by economic or legal forces.

The overarching goal of this paper

is to understand the global landscape of statutory, regulatory, and contractual regimes governing

offshore oil and gas decommissioning, and to help identify key financial and environmental risks

that might arise in a rapid phase-out scenario presented by the energy transition. This paper will

inform future research projects and policy recommendations aimed at ensuring that oil companies

are held responsible for environmental remediation, and that those liabilities are adequately funded.

The analysis of contractual regimes for each jurisdiction focuses on the two or three most recently concluded investor–

state contracts governing offshore petroleum operations retrieved as of May 19, 2022, from ResourceContracts.org, the

largest online repository of publicly available oil, gas, and mining contracts. See “ResourceContracts.org - Search Contracts,”

Resource Contracts (website), Natural Resource Governance Institute (NRGI), CCSI, World Bank Group, and Open Oil,

https://www.resourcecontracts.org/contracts.

The contracts analyzed may have been concluded before the enactment of the latest regulations analyzed in this paper.

Certain contracts may include stabilization clauses that freeze the regulatory landscape, preventing new or modified

laws from affecting investors and private companies. For further analysis, see Martin Dietrich Brauch, Esteban F. Fresno

Rodríguez, and José Luis Gallardo Torres. Provisions on Liability for Decommissioning Upstream Offshore Oil and Gas

Infrastructure in Investor–State Contracts. NEW YORK: COLUMBIA CENTER ON SUSTAINABLE INVESTMENT (CCSI), forthcoming

September 2023, https://ccsi.columbia.edu/decommissioning-offshore.

While Brazil is currently preparing for a wave of offshore decommissioning, industry analysts note that the current

period is “the first time that Brazil has seen major decommissioning activity.” Brazil O&G Sector Enters Major

Decommissioning Phase with Stronger ESG Demands, BNAMERICAS (Feb. 16, 2023),

https://www.bnamericas.com/en/news/brazil-og-sector-enters-major-decommissioning-phase-with-stronger-esg-

demands.

Keith B. Hall, Decommissioning of Offshore Oil and Gas Facilities in the United States, 14 CHARLESTON L. REV. 437, 443 (2020)

(noting that between 2002 and 2017 approximately 1500 platforms and many other structures were “removed from

federal waters in the Gulf of Mexico.”).

“Stranded assets are . . . those assets that at some time prior to the end of their economic life (as assumed at the

investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of

return), as a result of changes associated with the transition to a low-carbon economy (lower than anticipated demand /

prices).” Stranded Assets, CARBON TRACKER INITIATIVE (Aug. 23, 2017), https://carbontracker.org/terms/stranded-assets/.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

The first part of this paper provides a high-level overview of the legal and economic

structures that govern offshore oil and gas decommissioning. Section 2 discusses the sources of

decommissioning law, which spring from a mix of international, national, and contractual

structures. The bulk of this section focuses on treaties and standards that create obligations for states

that explore offshore oil and gas, and set a baseline for decommissioning obligations. Depending on

the jurisdiction, these international law obligations may or may not be transposed into national law,

or otherwise applied to private sector actors through statutes, regulations, and contracts. Section 3

discusses the way in which jurisdictions allocate liability for decommissioning. Section 4 discusses

the various financing mechanisms that affect decommissioning. These mechanisms include the

funding structures that control when and how decommissioning liabilities are paid, the guarantee,

bonding, and security arrangements that ensure decommissioning liabilities will be paid, and the tax

implications of decommissioning finance. Section 5 briefly highlights gaps and risks that are

presented by the previously discussed mechanisms in a rapid phase-out scenario.

Throughout the

section, theoretical discussions are colored and given context by specific examples from oil- and gas–

producing jurisdictions. Finally, Section 6 provides general recommendations for policymakers,

academics, and industry participants seeking to protect the public in a rapid phase-out scenario and

to ensure that fossil fuel companies meet their decommissioning obligations.

The second part of this paper, Appendices 1 through 10, provides overviews of the laws,

regulations, and contracts governing decommissioning in ten major oil- and gas-producing

jurisdictions across the world: Angola, Australia, Brazil, Indonesia, Malaysia, Mexico, Nigeria,

Norway, the United Kingdom, and the United States.

These jurisdictional overviews focus on the

For the purposes of this paper, a “rapid phase-out” scenario refers to a scenario in which offshore hydrocarbon assets

suffer either “economic stranding” from a change in the price of oil or gas or cost of extraction or “regulatory stranding”

from legal restrictions on offshore exploration for oil or gas products. See Stranded Assets, CARBON TRACKER INITIATIVE

(Aug. 23, 2017), https://carbontracker.org/terms/stranded-assets/.

This paper is general, and does not attempt to quantify stranded offshore assets within any particular field or

jurisdiction. However, studies of regional fossil fuel reserves have suggested that, in a transition scenario compatible

with the Paris Agreement’s goal of limiting end-of-century global warming to 1.5°C, by 2050 up to 83% of oil reserves in

some jurisdictions may be unextractable. Dan Welsby, James Price, Steve Pye, & Paul Ekins, Unextractable Fossil Fuels in a

1.5°C World, 597 NATURE 230, 233 (Sept. 9, 2021), https://doi.org/10.1038/s41586-021-03821-8.

This overview was assembled through a review of English-language legal resources. These include academic and

industry literature, along with government-produced primary sources or, where available, authoritative translations of

those sources. However, offshore oil and gas exploration is a politically and economically significant activity in each of

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

same areas highlighted in the body of the paper: sources of decommissioning law, allocation of

decommissioning liability, and decommissioning finance structures.

2. SOURCES OF LAW GOVERNING DECOMMISSIONING

OBLIGATIONS

2.1 International Law

Several longstanding multilateral treaties govern the general decommissioning obligations

of coastal states, and these treaties are further supplemented by regional agreements and

internationally accepted standards. These international agreements and standards are not generally

the primary source of decommissioning obligations for offshore oil companies. However, these

international and regional frameworks set standards and customary obligations that are referenced

in and incorporated by national laws, regulations, and contracts.

Oceanic treaties also set the outer

boundaries for state conduct, and several widely-subscribed treaties require states to ensure the safe

removal of abandoned offshore installations in their jurisdictions. Perhaps in recognition of these

obligations, jurisdictions like the United Kingdom often describe the nation (or its taxpayers) as the

“decommissioner of last resort.”

2.1.1 Major Multilateral Treaties

The international law of offshore decommissioning has its roots in the 1958 Geneva

Convention on the Continental Shelf (the “Geneva Convention”). The Geneva Convention governs

the covered jurisdictions, and many jurisdictions have new or quickly evolving legal regimes. In addition, offshore oil

and gas installations have long lifespans, and the permits of specific existing installations may be issued under, and

governed by, previous regulations, rules, or standards. While all efforts were made to ensure that these overviews are

accurate, current, and broadly applicable, the authors caution against using this paper as the primary tool to assess legal

duties with respect to any specific offshore installation.

For example, Nigeria’s Petroleum Industries Act of 2021 explicitly requires decommissioning to align with the

standards prescribed by the International Maritime Organization. Petroleum Industries Act (2021) Cap. (2) § 232(1)(a)–

(b), O.G. A.121, A.271 (Nigeria); see infra Appendix 7 (discussing Nigeria’s decommissioning regime).

CONSULTATION ON ESTABLISHING THE OFFSHORE DECOMMISSIONING REGIME FOR CO2 TRANSPORT AND STORAGE NETWORKS

36, U.K. DEPARTMENT FOR BUSINESS, ENERGY & INDUSTRIAL STRATEGY (Aug. 2021),

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1007773/ccus-

decommissioning-consultation.pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

the use of the sea and seabed on the “continental shelf,”

and its drafters were not primarily

concerned with environmental preservation.

However, the Geneva Convention provides that

“[a]ny [continental shelf] installations which are abandoned or disused must be entirely removed.”

The 1972 Convention on the Prevention of Marine Pollution by the Dumping of Wastes and

Other Matter (the “London Convention”) was the first international convention to take a

comprehensive approach to “the protection of the marine environment from human activities,” such

as the abandonment of oil and gas infrastructure.

The London Convention governs the intentional

dumping of waste at sea, and its definition of “dumping” includes “any deliberate disposal at sea of

. . . platforms or other man-made structures at sea.”

The London Convention and a 1996 protocol

designed to modernize and eventually replace it take a “reverse list” approach, “which implies that

all dumping is prohibited unless explicitly permitted.”

However, the London Convention allows

oil and gas infrastructure to be decommissioned in place so long as its placement serves a purpose

other than disposal. This has been interpreted to allow certain “reefing” programs, where

abandoned platform infrastructure is used as the basis for artificial reefs.

As of the date of this

As used in the Geneva Convention, the “continental shelf” is defined as “(a) to the seabed and subsoil of the submarine

areas adjacent to the coast but outside the area of the territorial sea, to a depth of 200 metres or, beyond that limit, to

where the depth of the superjacent waters admits of the exploitation of the natural resources of the said areas;” and “(b)

to the seabed and subsoil of similar submarine areas adjacent to the coasts of islands.” Geneva Convention on the

Continental Shelf art. 1, Apr. 29, 1958, 499 U.N.T.S. 311.

Seline Trevisanut, Decommissioning of Offshore Installations: a Fragmented and Ineffectual International Regulatory

Framework, in THE LAW OF THE SEABED: ACCESS, USES, AND PROTECTION OF SEABED RESOURCES 431, 432 (Catherine Banet ed.

2020).

Geneva Convention on the Continental Shelf art. 5(5), Apr. 29, 1958, 499 U.N.T.S. 311.

Leon Moller, U.N. Law on Decommissioning Offshore Installations, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 21, 29 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

Convention on the Prevention of Marine Pollution by the Dumping of Wastes and Other Matter, art. III(1)(a)(ii), Dec,

29, 1972, 1046 U.N.T.S. 120.

STUDY ON DECOMMISSIONING OF OFFSHORE OIL AND GAS INSTALLATIONS: A TECHNICAL, LEGAL AND POLITICAL ANALYSIS 85,

EUROPEAN COMMISSION (Sept. 2021), https://op.europa.eu/en/publication-detail/-/publication/7d7d51a5-8d44-11ec-8c40-

01aa75ed71a1.

UNITED NATIONS ENVIRONMENT PROGRAMME, LONDON CONVENTION AND PROTOCOL/UNEP: GUIDANCE FOR THE

PLACEMENT OF ARTIFICIAL REEFS 13–14, UNEP REGIONAL SEAS REPORTS AND STUDIES NO. 187 (2009).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

report, there are 87 parties to the London Convention and 53 parties to the 1996 modernization

protocol.

Since 1982, the Geneva Convention has been largely supplanted by the United Nations

Convention on the Law of the Sea (“UNCLOS”). UNCLOS “supersedes the 1958 conventions . . . for

States who are parties to UNCLOS.”

UNCLOS was designed “as a framework convention and a

living instrument,” and its environmental protection provisions in particular contain many “rules of

reference” that anticipate the development of both global and regional standards.

UNCLOS has

168 parties and is “one of the most widely ratified treaties.”

However, the United States, a

significant offshore oil and gas producer, has not ratified UNCLOS and remains subject to the

Geneva Convention (see Box 1: The United States and UNCLOS).

As a general matter, UNCLOS establishes that coastal states are the primary regulators of

offshore activity on their adjacent continental shelf, and gives these states “the exclusive right to

authorize and regulate drilling on the continental shelf for all purposes.”

With respect to

decommissioning, UNCLOS Article 60(3) requires that, if states build or allow offshore facilities,

“[a]ny installations or structures which are abandoned or disused shall be removed to ensure safety

of navigation, taking into account any generally accepted international standards established in this

regard by the competent international organization.”

This decommissioning rule has three significant features. First, UNCLOS abandons the

Geneva Convention requirement of complete removal. This concession has been credited to the fact

Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter, INTERNATIONAL MARITIME

ORGANIZATION (n.d.), https://www.imo.org/en/OurWork/Environment/Pages/London-Convention-Protocol.aspx.

Allison Leigh Richmond, Scrutinizing the Shipwreck Salvage Standard: Should A Salvor Be Rewarded for Locating Historic

Treasure?, 23 N.Y. INT’L L. REV. 109, 125 (2010); see United Nations Convention on the Law of the Sea art. 311(1), Dec. 10,

1982, 1833 U.N.T.S. 397 (providing that UNCLOS “shall prevail, as between State Parties, over the Geneva Conventions

on the Law of the Sea,” a set of four treaties including the Geneva Convention on the Continental Shelf).

Seline Trevisanut, Decommissioning of Offshore Installations: A Fragmented and Ineffectual International Regulatory

Framework, in THE LAW OF THE SEABED: ACCESS, USES, AND PROTECTION OF SEABED RESOURCES 431, 432 (Catherine Banet ed.

2020).

UNCLOS: THE LAW OF THE SEA IN THE 21ST CENTURY ¶ 1, INTERNATIONAL RELATIONS AND DEFENSE COMMITTEE OF THE

HOUSE OF LORDS OF THE UNITED KINGDOM (Mar. 1, 2022),

https://committees.parliament.uk/publications/9005/documents/159002/default/.

United Nations Convention on the Law of the Sea art. 81, Dec. 10, 1982, 1833 U.N.T.S. 397.

United Nations Convention on the Law of the Sea art. 60(3), Dec. 10, 1982 1833 U.N.T.S. 397.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

that, by the 1980s, “the oil and gas industry was operating in deeper waters and harsher and more

remote environments, using heavy structures that were more difficult and expensive to remove.”

Instead, Article 60(3) allows the partial removal of offshore facilities, so long as states give

“[a]ppropriate publicity . . . to the depth, position and dimensions of any installations or structures

not entirely removed.” Second, Article 60(3) explicitly includes environmental protection as a goal

of decommissioning. While the text of the rule prioritizes “safety of navigation,” it also provides that

removal must “have due regard to fishing, the protection of the marine environment and the rights

and duties of other States.”

Third, and most significantly, Article 60(3) contains one of the “rules of reference” mentioned

earlier in this subsection. It requires that decommissioning of offshore installations must “tak[e] into

account any generally accepted international standards established . . . by the competent

international organization.”

This requirement assumes that states and international organizations

will negotiate and promulgate “additional instruments through other international institutions” that

will detail the decommissioning obligations under Article 60(3).

Alexandra Wawryk, International Regulation of Decommissioning, in THE REGULATION OF DECOMMISSIONING,

ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 27, 30 (Eduardo

G. Pereira, Alexandra Wawryk, Heike Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

United Nations Convention on the Law of the Sea art. 60(3), Dec. 10, 1982 1833 U.N.T.S. 397.

Id.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

Box 1: The United States and UNCLOS

2.1.2 IMO Guidelines and Regional Conventions

Within the broad framework of UNCLOS, many additional decommissioning standards

have been set through regional treaties or through generally accepted standards set by an

international organization. This subsection only lists a small set of the many international

agreements that have implications for offshore oil and gas decommissioning. Offshore oil and gas

rigs are complex physical infrastructure projects, and decommissioning may be affected by a number

of seemingly unrelated treaties, including environmental and human rights treaties (see Box 2:

Mexico, Indigenous Rights, and Decommissioning Obligations under Non-Decommissioning Treaties).

The most prominent international organization addressing offshore decommissioning is the

International Maritime Organization (“IMO”), a U.N. specialized agency that supported the initial

THE UNITED STATES AND UNCLOS

While UNCLOS is one of the most widely adopted treaties, and the United States

was heavily involved in its drafting and negotiation, the United States is one of the few

countries in the world that is not a party to UNCLOS.

As “the United States has yet to

ratify the UNCLOS, [it] consequently is not bound by its terms.”

The United States

remains bound instead by the Geneva Convention and the London Convention, as well

as by the terms of various multilateral and bilateral treaties.

However, UNCLOS is not entirely irrelevant in American law. Since 1983, the

executive branch of the United States has had an official policy of aligning its actions with

the balance of interests codified in UNCLOS,

and U.S. courts occasionally look to

UNCLOS as “a codification of customary international law.”

Office of the Staff Judge Advocate, U.S. Indo-Pacific Command, The U.S. Position on the U.N.

Convention on the Law of the Sea (UNCLOS), 97 INT’L L. STUD. 81, 82 (2021).

2 Eduardo Canales, Steven P. Otillar, United States, in OIL AND GAS DECOMMISSIONING: LAW,

POLICY, AND COMPARATIVE PRACTICE 415, 422 (Marc Hammerson & Nicholas Antonas eds.,

2nd. ed. 2016).

3 Id.

Office of the Staff Judge Advocate, U.S. Indo-Pacific Command, The U.S. Position on the U.N.

Convention on the Law of the Sea (UNCLOS), 97 INT’L L. STUD. 81, 82 (2021).

5 Ved P. Nanda, David K. Pansius, Bryan Neihart, Unratified treaties, in LITIGATION OF

INTERNATIONAL DISPUTES IN U.S. COURTS (Dec. 2022).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

negotiation of UNCLOS.

IMO is “is the global standard-setting authority for the safety, security

and environmental performance of international shipping.”

In 1989 the IMO issued its Guidelines

and Standards for the Removal of Offshore Installations and Structures on the Continental Shelf and

in the Exclusive Economic Zone (the “IMO Guidelines and Standards”). The IMO Guidelines and

Standards provide significant technical guidance on when and how decommissioning should

commence. This guidance addresses (1) when coastal states must commence decommissioning, (2)

environmental and safety considerations affecting decommissioning, and (3) standards outlining

whether complete or partial removal is appropriate.

The IMO Guidelines and Standards are not

legally binding in and of themselves, but “provide minimum standards and allow the coastal states

wide discretionary powers as to their adoption in national law.”

These international

decommissioning standards may be incorporated by reference into oil and gas contracts. For

example, Brazil’s 2018 model concession contract sets decommissioning standards by reference to

international petroleum industry standards at the time of abandonment.

Many countries are also members of regional bodies under the United Nations Environment

Programme’s “Regional Seas Programme,” which administers a number of regional organizations

and treaty bodies that work to protect marine and coastal environments and “promote sustainable

development.”

One of the most prominent is the 1992 Convention for the Protection of the Marine

Environment of the Northeast Atlantic (the “OSPAR Convention”). The OSPAR Convention

coordinates activity with the goal of “protecting the marine environment of the North-East Atlantic”

The IMO’s Guidelines have been described as “the most comprehensive and widely accepted international standard on

the decommissioning of offshore platforms.” Leon Moller, U.N. Law on Decommissioning Offshore Installations, in OIL AND

GAS DECOMMISSIONING: LAW, POLICY, AND COMPARATIVE PRACTICE 21, 28 (Marc Hammerson & Nicholas Antonas eds.,

2nd. ed. 2016).

Introduction to IMO, INTERNATIONAL MARITIME ORGANIZATION (n.d.),

https://www.imo.org/en/About/Pages/Default.aspx.

Alexandra Wawryk, International Regulation of Decommissioning, in THE REGULATION OF DECOMMISSIONING,

ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 27, 31–32

(Eduardo G. Pereira, Alexandra Wawryk, Heike Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

Leon Moller, U.N. Law on Decommissioning Offshore Installations, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 21, 26 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

Agência Nacional Do Petróleo, Gás Natural E Biocombustíveis - ANP, Concession Model Contract, 2018,

https://resourcecontracts.org/contract/ocds-591adf-1309539708/view#/pdf.

Regional Seas Programmes, UNITED NATIONS ENVIRONMENTAL PROGRAMME (n.d.), https://www.unep.org/explore-

topics/oceans-seas/what-we-do/working-regional-seas/regional-seas-programmes.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

and “ensur[ing] sustainable management” of the region.

It sets out a detailed framework

surrounding decommissioning, and enshrines a strong presumption against decommissioning-in-

place.

In addition, it emphasizes a “polluter pays principle” that “requires that the costs of

pollution prevention, control and reduction measures must be borne by the polluter.”

The OSPAR

Convention has been ratified by 15 states and the European Union.

Other regional treaty bodies have established their own decommissioning rules or

guidelines. In 1989 the Association of South East Asian Nations (“ASEAN”) created the ASEAN

Council on Petroleum (“ASCOPE”) to coordinate “the development of the petroleum resources in

the region.”

In 2012 ASCOPE released a set of decommissioning guidelines that “provide a

technical reference document for decommissioning in the ASEAN region and expand on the general

principles set out in UNCLOS and the IMO Guidelines.”

These guidelines “are intended to

complement national decommissioning procedures, rather than replace them.”

Alexandra Warwryk, Catherine Banet & Eduardo G. Pereira, Regional Seas Conventions and Decommissioning, in THE

REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION

TO OPPORTUNITIES 47, 52 (Eduardo G. Pereira, Alexandra Wawryk, Heike Trischmann, Catherine Banet & Keith B. Hall

eds. 2020).

Id. at 54–55.

Polluter Pays Principle, OSPAR CONVENTION (n.d.), https://www.ospar.org/convention/principles/polluter-pays-

principle.

These states are Belgium, Denmark, the European Union, Finland, France, Germany, Iceland, Ireland, Luxembourg, the

Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. OSPAR Convention, OSPAR

CONVENTION (n.d.), https://www.ospar.org/convention.

Declaration for the Establishment of the ASEAN Council on Petroleum (Ascope) § 1, 6 ASEAN Economic Bulletin 189 (Nov.

1989).

Gabriel Procaccini, Paul Greening, & Eduardo Canales, The Coming Decommissioning Wave in Southeast Asia: What to

Expect and the Relevance of Experiences in the North Sea and U.S. Gulf of Mexico, AKIN GUMP (Apr. 2, 2020),

https://www.akingump.com/en/insights/blogs/speaking-energy/the-coming-decommissioning-wave-in-southeast-asia-

what-to-expect-and-the-relevance-of-experiences-in-the-north-sea-and-us-gulf-of-mexico.

Id.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

Box 2: Mexico, Indigenous Rights, and Decommissioning Obligations under Non-

Decommissioning Treaties

MEXICO, INDIGENOUS RIGHTS, AND DECOMMISSIONING

OBLIGATIONS UNDER NON-DECOMMISSIONING TREATIES

In 1990 Mexico ratified the 1989 Convention Concerning Indigenous and Tribal

Peoples in Independent Countries (“ILO Convention 169”).

ILO Convention 169

provides, among other measures, that indigenous and tribal peoples have the right to

consult on and participate in decision-making processes “whenever consideration is

being given to legislative or administrative measures which may affect them directly.”

ILO Convention 169 makes no mention of decommissioning, and was not

initially viewed as a significant part of Mexico’s infrastructure law. However, in 2010

the Huichol people of Western Mexico used ILO Convention 169 as the basis for their

opposition to a massive silver mine in Wirikuta, an important religious pilgrimage site

for the Huichol.

Following this dispute, Mexico enacted legislation mandating that

infrastructure developments, including oil and gas infrastructure, must

comprehensively consult with any affected indigenous communities. These

consultations “must include the intended final destination of decommissioned oil and

gas infrastructure, and must thoroughly inform [affected communities] of the

consequences of total decommissioning or leaving the [infrastructure] behind.”

Mexico’s offshore energy infrastructure is often developed in areas where no

indigenous consultation is needed,

but some decommissioning activities may impact

neighboring indigenous communities and trigger consultation rights.

1 Ratifications of C169 - Indigenous and Tribal Peoples Convention, 1989 (No. 169), INTERNATIONAL

LABOR ORGANIZATION (n.d.),

https://www.ilo.org/dyn/normlex/en/f?p=1000:11300:0::NO:11300:P11300_INSTRUMENT_ID:312314

Convention (No. 169) Concerning Indigenous and Tribal People in Independent Countries, 27 June 1989,

1650 U.N.T.S. 383.

3 See generally Andrew Boni, Claudio Garibay, & Michael K. McCall, Sustainable Mining, Indigenous

Rights and Conservation: Conflict and Discourse in Wirikuta/Catorce, San Luis Potosi, Mexico, 80

GEOJOURNAL 759 (2015) (discussing the Wirikuta conflict).

4 Carlos A. Escoto Carranza & Antonio Borja Charles, Mexico, in THE REGULATION OF DECOMMISSIONING,

ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION TO

OPPORTUNITIES 465, 473–74 (Eduardo G. Pereira, Alexandra Wawryk, Heike Trischmann, Catherine

Banet & Keith B. Hall eds. 2020).

5 Indigenous Consults Slow Mexico’s Energy Plans, Argus Media (Apr. 12, 2018),

https://www.argusmedia.com/en/news/1661023-indigenous-consults-slow-mexicos-energy-plans.

6 See Shalanda H. Baker, Mexican Energy Reform, Climate Change, and Energy Justice in Indigenous

Communities, 56 Nat. Res. J. 369, 382 n.93 and accompanying text (discussing potential disputes over

energy infrastructure located in “ocean near the ancestral land” of indigenous groups in the Mexican state

of Oaxaca).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

2.2 National and Subnational Law

While the international treaties, frameworks, and organizations discussed in the previous

section affect the obligations of national governments and coordinate important shared interests

among regions, each state is the primary regulator of offshore oil and gas exploration and production

activities in the waters over which it has jurisdiction.

In addition to national law, offshore oil and

gas decommissioning may be subject to significant sub-national regulation. For example, the United

States has allocated ownership of and regulatory authority over near-coastal lands to its constituent

states under the Submerged Lands Act of 1983.

Countries that regulate offshore infrastructure at the subnational level can have significantly

different decommissioning rules for different installations. In Australia, for example, offshore oil

and gas installations within 3 nautical miles of the coast are governed by the law of the adjacent State

or Territory, while more distant installations are governed by the Commonwealth of Australia.

Prior to 2021, “the regulatory schemes for offshore decommissioning in Victoria and [Western

Australia],” the two states with the most offshore petroleum activities, were very similar to the

national regime.

However, in 2021 the Commonwealth of Australia revised its decommissioning

laws to introduce a scheme of “trailing liability” for decommissioning expenses.

Following the 2021

amendments, Western Australia’s relevant regulator, released a draft discussion paper suggesting

that it would not immediately adopt the Commonwealth’s trailing liability scheme.

In contrast, the

Alexandra Wawryk, Introduction, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE

OIL AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 3, 5 (Eduardo G. Pereira, Alexandra Wawryk, Heike

Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

Robert T. Anderson, Protecting Offshore Areas from Oil and Gas Leasing: Presidential Authority Under the Outer Continental

Shelf Lands Act and the Antiquities Act, 44 ECOLOGY L.Q. 727, 738–39 (2018) (describing a series of court decisions in the 20

century that confirmed federal control over submerged coastal lands, and the decision by Congress to “reverse[] the

outcome by enacting the Submerged Lands Act.”).

Aylin Cunsolo, Oil and Gas Regulation in Australia: Overview, THOMSON REUTERS PRACTICAL LAW (Dec. 1, 2020),

https://us.practicallaw.thomsonreuters.com/w-011-0184.

Alexandra Wawryk, Australia, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE

OIL AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 251, 269 (Eduardo G. Pereira, Alexandra Wawryk, Heike

Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

See infra Section 3.1.2: “Trailing Liability.”

Mark McAleer, Anne Beresford, & Lewis Pope, WA Regulator Signals Divergence from Federal Approach to

Decommissioning Obligations, ALLENS LINKLATERS (Sept. 27, 2022), https://www.allens.com.au/insights-

news/insights/2022/09/Western-Australia-to-forge-its-own-oil-and-gas-decommissioning-path/.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

government of Victoria seems more open to following the Commonwealth’s model, and “has

already announced an intention to introduce trailing liability for decommissioning coal mines.”

The governance of offshore oil and gas resources can be a point of tension between national

and sub-national governments. For example, since 2018 there have been a series of disputes between

Malaysia’s federal government and its constituent states over ownership of and authority over

petrochemical resources. The states of Sarawak and Sabah in particular have argued that agreements

underlying their membership in the Malaysian Federation negate federal allocations of authority to

PETRONAS, Malaysia’s state-owned oil and gas company.

Despite years of legal battles and a

settlement agreement that included a USD 715 million payment from PETRONAS to Sarawak,

jurisdiction over and ownership of petrochemicals remain subject to inter-governmental disputes.

2.3 Contracts

In many states, contracts and other negotiated legal instruments form a vital part of the

regulatory regime governing offshore oil and gas activities. Contracts play a particularly important

role where a jurisdiction’s legal framework assigns ownership of offshore natural resources to the

host state; in these jurisdictions, private sector and public sector companies must participate in

offshore oil and gas exploration and production through contracts, leases, or other agreements

signed with the state, a specific ministry or agency, or a national oil company. These contracts can

generally be categorized into three types: concession agreements, production sharing contracts

Trevor Thomas & Thomas Milner, Country Updates: Australia, INTERNATIONAL BAR ASSOCIATION (Mar. 2023),

https://www.ibanet.org/clint-march-2023-country-updates.

See generally Wan M. Zulhafiz Wan Zahari & Farid Sufian bin Shuaib, The Distribution of Petroleum Resources in Malaysia:

Unpacking Federalism, 13 J. WORLD ENERGY L. & BUS. 369 (2020) (discussing the legal background of jurisdictional disputes

between Malaysia’s state and federal governments over petrochemicals).

A. Ananthalakshmi, Petronas Pays $700M in Tax to Sarawak State after Dispute Settlement, OFFSHORE ENGINEER (Sept. 18,

2020), https://www.oedigital.com/news/481793-petronas-pays-700m-in-tax-to-sarawak-state-after-dispute-settlement.

See Roger Chin, President of the Sabah Law Society, Opening of the Legal Year 2023 (Jan. 13, 2023) (transcript available

at the following link: https://www.sabahlawsociety.org/userfiles/media/sabahlawsociety.org/sls-speech-for-oly-2023-

miri_1.pdf) (discussing legal theories addressing the distribution of ownership of offshore oil resources between

Malaysia’s federal government and the State of Sabah); see infra Annex 5.A (discussing the dispute in more depth).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

(“PSCs”), and technical services agreements (see Box 3: Primary Types of Offshore Oil and Gas

Contract).

Box 3: Primary Types of Offshore Oil and Gas Contract

In jurisdictions that use contracts to govern offshore oil and gas operations, the contractual

provisions supplement and provide detail to the applicable national legal and regulatory

framework. While domestic statutes, decrees, and regulations that are universally applied to private

See also Kienzler, D., Toledano, P., Thomashausen, S., and Szoke-Burke, S. (June 2015). “Natural Resource Contracts as

a Tool for Managing the Mining Sector.” Bundesanstalt für Geowissenschaften und Rohstoffe (BGR). Pages 17-19.

PRIMARY TYPES OF OFFSHORE OIL AND GAS CONTRACT

While offshore oil and gas contracts are complex and economically significant

documents that may be highly negotiated, certain types of agreements share distinctive

characteristics. The following descriptions are adapted from a 2015 analysis by the

Natural Resource Governance Institute:

Concession agreements: Under a concession agreement, a host government grants an oil

company the rights to develop petroleum resources in a given geographical area in

exchange for royalties, fees, taxes, or other payments. The government may also

participate directly in concession agreements as a joint venture partner of a private

entity, and receive a share of the production. The oil company funds, and assumes all

risks of, exploration, development, and production activities.

Production sharing contracts (“PSCs”): Under a PSC, the host government retains

ownership of the petroleum resources and contracts with an oil company to develop

the field in exchange for in-kind payments of produced oil or gas. The oil company

provides the funding and recovers its costs from the field’s production, sharing any

profits with the government based on an agreed-upon formula.

Technical service agreements: Under a technical service agreement, a host government

retains ownership and control of the petroleum resources, but contracts with an oil

company to conduct exploration and construction work and manage the development

process. The government pays the company in either cash or petroleum commodities

based on the activities it performs, rather than the productivity of the resources.

1 NATIONAL RESOURCE GOVERNANCE INSTITUTE, LEGAL FRAMEWORK: NAVIGATING THE WEB OF LAWS AND

CONTRACTS GOVERNING EXTRACTIVE INDUSTRIES (Mar. 2015),

https://resourcegovernance.org/sites/default/files/nrgi_Legal-Framework.pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

oil companies provide transparency and public certainty around decommissioning, negotiated

contractual provisions often play a more fundamental role in governing decommissioning

operations in jurisdictions with vague, fragmented, or nonexistent regulatory frameworks.

However, as discussed below, not every offshore contract imposes or allocates decommissioning

obligations. In these cases, offshore decommissioning obligations are governed exclusively by

generally applicable legal and regulatory frameworks.

Offshore oil and gas contracts may, in certain cases, supplant generally applicable laws. An

extensive review of investor-state contracts signed between 2010 and 2018 found that “over 60% of

the oil, gas and mining contracts have stabilization clauses”

or change-in-law clauses, which limit

the application of new or modified laws to contracts that have already been executed.

These clauses

can crystalize the host state’s legal and regulatory landscape, ether precluding new or amended laws

from applying to the oil company (known as freezing clauses) or requiring a host state to compensate

the company for the financial impacts of the new or modified legislation (known as economic

equilibrium clauses). There are also hybrid clauses that allow parties to specify which statutory or

regulatory amendments should apply to the oil company and when the state must compensate the

oil company for a change in the legal regime.

Change-in-law clauses can apply to purely fiscal

issues (taxes, royalties, rents, tariffs, etc.), nonfiscal areas (environment, labor, and health and safety),

or both,

and may or may not establish a limited timeframe during which the relevant laws are

“stabilized.

Contracts from several of the jurisdictions on which this report focuses contained some form

of stabilization clause. For example, a 2006 Angolan PSC analyzed for this report contains a change-

in-law clause requiring the parties to renegotiate the PSC following any adverse legal change to

Aizawa and Mann, Environmental, Social and Economic Development Provisions in Investment Contracts, 100.

Martin Dietrich Brauch, Perrine Toledano, and Cody Aceveda, Allocation of Climate-Related Risks in Investor–State

Mining Contracts 8, NEW YORK: COLUMBIA CENTER ON SUSTAINABLE INVESTMENT (CCSI), (June 2022),

https://ccsi.columbia.edu/content/allocation-climate-change-risks-investor-state-mining-contracts.

“Glossary: Stabilization Clause,” THOMSON REUTERS PRACTICAL LAW (n.d.),

https://uk.practicallaw.thomsonreuters.com/1-501-6477.

Howard Mann, Stabilization in Investment Contracts: Rethinking the Context, Reformulating the Result, INVESTMENT TREATY

NEWS (Oct. 7, 2011), https://www.iisd.org/itn/en/2011/10/07/stabilization-in-investment-contracts-rethinking-the-context-

reformulating-the-result.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

“restore [the] rights, obligations, and benefits” of the original contract.

Similarly, Malaysia’s 1994

model Production Sharing Agreement establishes that the parties must renegotiate the contract after

any changes to the tax regimes of Malaysia or Thailand affecting the contract, in order to restore the

oil company to “the same fiscal status” as originally anticipated by the contract.

3. LIABILITY FOR DECOMMISSIONING

3.1 Responsibility for Decommissioning

3.1.1 Owner/Operator Liability

Each jurisdiction examined for this report requires the private operators of offshore oil and

gas infrastructure to either pay for its decommissioning or contribute to the cost of

decommissioning. Some jurisdictions, like the United Kingdom, assign responsibility not just to the

immediate operator of a facility but towards their owners “and their associated persons (such as

affiliates and entities in which 50% or more of shares are held).”

While private parties may be legally responsible for costs, the statutory and contractual

treatment of those costs in different jurisdictions may significantly redistribute the economic burden.

Some investor-state contracts might directly share or redistribute decommissioning obligations.

More subtly, profit-sharing agreements between private companies and host governments may

redistribute the economic burdens of decommissioning by allowing private companies to recoup

The provision reads, in relevant part: “in the event that any change in the provisions of any Law, decree or regulation

in force in the Republic of Angola occurs subsequent to the signing of [the contract] which adversely affects the

obligations, rights and benefits hereunder, then the Parties shall agree on amendments to the Agreement to be submitted

to the competent authorities for approval, so as to restore such rights, obligations and forecasted benefits. Sociedade

Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), Vaalco Angola (Kwanza) Inc., Sonangol

Pesquisa e Produção S.A., InterOil Exploration and Production ASA, Production Sharing Agreement, 2006, Article 37.2,

https://resourcecontracts.org/contract/ocds-591adf-3664745125/view#/pdf.

Petronas Carigali Sdn. Bhd., Triton Oil Company of Thailand, PSA, 1994, Article 21.3.

Alastair Young, Alistair Calvert, & Jameela Bond, Decommissioning Oil and Gas Wells in the UK – High Court Delivers

Important Judgment with Ramifications for M&A Deals and the Provision of Decommissioning Security, BRACEWELL (June 1,

2021).

For example, a 2005 contract from Libya analyzed for the Companion Report provides that “[e]ach Party shall bear and

finance fifty percent (50%) of the costs, expenses and liabilities for Abandonment which may be incurred as a result of

Development Operations and Exploitation Operations.” Verenex Energy Area 47 Libya Limited and Medco International

Ventures Limited, Production Sharing Agreement, 2005, Article 26.2, https://resourcecontracts.org/contract/ocds-591adf-

5545997817/view#/pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

their decommissioning costs before any leftover profits are shared. For example, in Angolan

Production Sharing Agreements (“PSAs”),

while contractors are generally responsible for

decommissioning expenses, they may recover the value of their planned contributions to

decommission costs as “Cost Oil,”

before the remaining revenue, the “Profit Oil,” is split between

the contractor and Angola.

Designating decommissioning funds as “Cost Oil” means that the

burden is effectively shared between the private contractor and the government, assuming that

enough revenue is produced to cover the expenses.

3.1.2 “Trailing Liability”

Under some legal regimes, former owners of an offshore installation can be ordered to pay

for decommissioning expenses if the current owner is unable to do so. This mechanism, which is

sometimes called “trailing liability,” is applied in various forms in Norway,

the United Kingdom,

and the United States,

among other jurisdictions. Australia recently instituted trailing liability in

2021, following the high-profile collapse of a company that had recently acquired offshore assets

from Woodside Petroleum, an Australian energy giant.

The existence of a trailing liability regime

“may . . . have an effect on the commercial value of assets which are close to the end of their life.”

Regimes that provide for trailing liability often emphasize that the mechanism “is intended as an

In Angola private oil and gas companies operate under concession agreements entered into with a regulatory body.

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 226–28 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

Id. at 234–35.

See Kirsten Bindermann, Production-Sharing Agreements: An Economic Analysis, OXFORD INSTITUTE FOR ENERGY STUDIES

(Oct. 1999), https://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/WPM25-

ProductionSharingAgreementsAnEconomicAnalysis-KBindemann-1999.pdf (defining common terms in PSAs).

Catherine Bannet, Norway, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL

AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 541, 553 (Eduardo G. Pereira, Alexandra Wawryk, Heike

Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

Alastair Young, Alistair Calvert, & Jameela Bond, Decommissioning Oil and Gas Wells in the UK – High Court Delivers

Important Judgment with Ramifications for M&A Deals and the Provision of Decommissioning Security, BRACEWELL (June 1,

2021).

See infra Section 16.2.1: “United States: Responsibility for Decommissioning.”

See Adam Morton, Calls for Woodside to Pay $200M to Clean Up Moribund Timor Sea Oil Site it Ran Until 2016, Guardian

(Aug. 8, 2020), https://www.theguardian.com/australia-news/2020/aug/09/calls-for-woodside-to-pay-200m-to-clean-up-

moribund-timor-sea-oil-site-it-ran-until-2016; see also Box 4: Australia's Special Decommissioning Levy (discussing the

transaction and bankruptcy).

Trevor Thomas & Thomas Miller, Trailing Liability for Asset Decommissioning in Australia, LEXOLOGY (Aug. 30, 2022),

https://www.lexology.com/library/detail.aspx?g=2e20aa55-92d5-4894-8b15-7dbd60201ff8

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

option of last resort and is expected to be used rarely.”

A trailing liability regime, by itself, does

not guarantee that liable former owners are actually capable of paying decommissioning expenses.

3.1.3 Government Liability

Governments may also assume direct responsibility for decommissioning costs, though they

rarely do. In the 10 jurisdictions reviewed for this report, assumption of decommissioning liability

was most common for governments that play a direct commercial role in the oil and gas industry.

For example, Norway has commercial exposure to its oil and gas industry through two entities:

Petoro, a wholly state-owned entity that takes an equity interest in some offshore licenses,

and

Equinor ASA, a (formerly state-owned) publicly traded energy company that operates “about 70%

of all oil and gas production on the Norwegian shelf.”

Norway owns a 67% stake in Equinor,

although Equinor is “run on a commercial basis” and has operations across the world.

Both of these

entities have decommissioning obligations under Norwegian law; Petoro is liable for its own share

of decommissioning costs alongside private stakeholders,

and Equinor has significant

decommissioning liability of its own despite Norway’s equity stake.

Governments can also assume decommissioning responsibilities if they take over an offshore

installation following the exit of a private company. For example, in Indonesia a recent regulation

allows Pertamina, Indonesia’s state-owned oil company, to take over private offshore operations on

the expiration of the facility’s PSC, regardless of “whether the initial Contractor has applied for an

Press Release, Australian Department of Industry, Science, & Resources, Trailing Liability for Decommissioning of

Offshore Petroleum Property Guidelines Released (Mar. 7, 2022), https://www.industry.gov.au/news/trailing-liability-

decommissioning-offshore-petroleum-property-guidelines-released.

The Government’s Revenues, NORWEGIAN PETROLEUM (n.d.), https://www.norskpetroleum.no/en/economy/governments-

revenues/.

Id.

HANNE STORESTEIN & GURO KRISTOFFERSEN LYSNES, LIABILITY FOR DECOMMISSIONING OF OIL AND GAS INSTALLATIONS ON THE

NORWEGIAN CONTINENTAL SHELF: NORWEGIAN PUBLIC AND PRIVATE LAW PERSPECTIVES 7 (Univ. Bergen May 10, 2022).

See, e.g., Melisa Cavcic, Equinor Closes Veslefrikk Chapter in Readiness for Decom Opps, OFFSHORE ENERGY (Feb. 22, 2022),

https://www.offshore-energy.biz/equinor-closes-veslefrikk-chapter-in-readiness-for-decom-ops/ (discussing Equinor’s

decommissioning of offshore oil and gas facilities in Norway).

MEMR Regulation No. 23 of 2021.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

extension.”

This affects decommissioning liability because this regulation “also stipulates that

outstanding post-operation obligations of a PSC nearing expiry are to be carried out by the entity

that has been appointed by the [Ministry of Energy and Mineral Resources] to resume the PSC.”

the event of a takeover, that entity would be Pertamina.

3.1.4 Decommissioning Provisions

Decommissioning obligations may be assigned and defined by designated decommissioning

provisions in oil and gas contracts. Contracts that address decommissioning obligations adopt a

variety of approaches. Decommissioning provisions may range from simple references to the parties’

statutory obligations or unelaborated references to “decommissioning,” to clauses that only address

a portion of the decommissioning process, to comprehensive decommissioning obligations. Many

contracts fail to address decommissioning at all, and rely entirely on external legal frameworks to

govern the decommissioning process.

The amount of detail contained in contracts varies significantly. One set of contracts simply

make reference to the general legal framework governing decommissioning. For example, a 2003

Nigerian contract examined for this report does not prescribe decommissioning standards, but

assigns decommissioning liability to one of the private parties

100

and provides that the

decommissioning process shall be carried out in accordance with specified regulations and

guidelines issued by the Nigerian Department of Petroleum Resources.

101

A 2021 contract from the

United Kingdom similarly contains few specific decommissioning requirements, but simply

provides that decommissioning must occur with “the consent in writing of the Oil and Gas

Authority.”

102

Other contracts may outline decommissioning obligations that embrace a broad

spectrum of activities. Nigerian contracts from 2007 and 2011 explicitly encompass a variety of

Fitriana Mahiddin, Syahdan Aziz, & Fadhira Mediana, Oil and Gas Regulations: Indonesia 2023, ICLG (Feb. 22, 2023),

https://iclg.com/practice-areas/oil-and-gas-laws-and-regulations/indonesia.

Id.

100

Nigerian National Petroleum Corporation, Shell Petroleum Development Company of Nigeria Ltd., Nigerian Agip Oil

Company Ltd., Elf Petroleum Nigeria Ltd., and Universal Energy Resources Limited, Farmout Agreement, 2003, Article

19.5,1 https://resourcecontracts.org/contract/ocds-591adf-6921063233/view#/pdf.

101

Id. at Article 14.4.

102

Oil and Gas Authority, Anasuria Hibiscus UK Limited, Zennor Exploration Limited, Exploitation and

Exploration License, 2021, Article 19, https://resourcecontracts.org/contract/ocds-591adf-6212621955/view#/pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

“decommissioning” activities, including the plugging and abandonment of wells, the removal and

disposal of equipment and facilities including well heads, processing and storage facilities,

platforms, pipelines, transport and export facilities, roads, buildings, wharves, plants, machinery,

fixtures, the restoration of sites and structures, and the payment of damages to property lessors.

103

3.2 Post-Decommissioning Liability

Often, private offshore operators remain liable long after decommissioning, both for the

adequacy of their decommissioning work and for any environmental harms that may arise from

their offshore operations. For example, the United Kingdom provides that the owners of an offshore

installation or pipeline at the time of its decommissioning “remain the owners of any residues and

remains after decommissioning,” and “[r]esidual liability remains with the owners in perpetuity.”

104

“The relinquishment of the field licence is not related to completion of a decommissioning

programme or any ongoing liabilities under it.”

105

In practice, however, liability to third parties is

limited by principles of English and Scottish common law, which provides that the owner of an

offshore installation is only liable for “loss arising from his or her negligence in circumstances where

a duty of care is owed to the other party.”

106

In other cases, a host government might assume post-decommissioning liability after it

confirms that the private party has adequately completed its decommissioning obligations. For

example, modern Production Sharing Agreements in Angola provide that if Angola requires a

private contractor to surrender an offshore installation, the private contractors “shall have no further

103

Nigerian National Petroleum Corporation, Gas Transmission and Power Limited, Energy 905 Suntera Limited,

Ideal Oil and Gas, Production Sharing Agreement, 2007, Clause 1(r), https://resourcecontracts.org/contract/ocds-591adf-

0523462294/view#/pdf;

Nigerian Petroleum Development Company Limited, Atlantic Energy Drilling Concepts Nigeria Limited, Production

Sharing Agreement, 2011, Annex C, Article 2(o), https://resourcecontracts.org/contract/ocds-591adf-

6476275683/view#/pdf.

104

GUIDANCE NOTES: DECOMMISSIONING OF OFFSHORE OIL AND GAS INSTALLATIONS AND PIPELINES, OFFSHORE PETROLEUM

REGULATOR FOR ENVIRONMENT AND DECOMMISSIONING 72 (Nov. 2018),

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/760560/Decom_Guid

ance_Notes_November_2018.pdf.

105

Id. at 73.

106

John Patterson, United Kingdom, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE

OIL AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 631, 642 (Eduardo G. Pereira, Alexandra Wawryk, Heike

Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

liability or obligation” in connection with that infrastructure “save in the event of gross negligence

or willful misconduct in the execution of the abandonment obligations.”

107

A 2018 presidential

decree provides that once decommissioning is complete and a satisfactory post-decommissioning

inspection has occurred, Angola’s designated concessionaire must “issue a release of liability and

indemnity agreement” for the private operators.

108

4. FINANCING DECOMMISSIONING

4.1 Decommissioning Funding Structures

4.1.1 Pay-as-you-go

As a general matter, where a private party is liable for decommissioning costs and no other

funding structure is provided by statute or regulation, decommissioning expenses are paid when

they are incurred.

109

This mechanism is fairly common, and jurisdictions as diverse as Australia

110

and Norway

111

fund decommissioning obligations on a “pay-as-you-go” basis. This structure can

pose obvious default risks unless the party bearing default obligations has diversified income

streams, since decommissioning obligations and their related payments usually occur at the end of

an offshore asset’s life “when the relevant field is most likely producing negative cash flow.”

112

107

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 231 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

108

New Rules on Abandonment of Wells and Decommissioning of Petroleum Facilities, CLARENCE ABOGADOS & ASOCIADOS,

(n.d.), https://clarenceabogados.com/client-alert/new-rules-on-abandonment-and-decommissioning/.

109

This does not preclude private parties from establishing their own prefunding structures, either contractually or as an

internal cash management tool.

110

Australia’s primary law regulating offshore decommissioning, the Offshore Petroleum and Greenhouse Gas Storage

Act 2006, does not establish decommissioning financing structures, “nor is there an industry or statutory fund to cover

decommissioning.” Alexandra Wawryk, Australia, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE

INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 251, 261 (Eduardo G. Pereira, Alexandra

Wawryk, Heike Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

111

See Frode Vareberg, Parent Company Guarantee Requirement for Future Decommissioning Cost in Corporate Transfers on

NCS, LEXOLOGY (Dec. 18, 2017), https://www.lexology.com/commentary/energy-natural-resources/norway/simonsen-

vogt-wiig-advokatfirma/parent-company-guarantee-requirement-for-future-decommissioning-cost-in-corporate-

transfers-on-ncs (noting that some have advocated for the establishment of decommissioning funds, but “there is no

indication that the ministry is actively considering such solutions.”).

112

Heike Trischmann, Decommissioning Security Agreements, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND

REUSE INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 117, 117 (Eduardo G. Pereira,

Alexandra Wawryk, Heike Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

4.1.2 Designated Fund

Some jurisdictions require offshore operators to reserve funds that are designated for

decommissioning costs. These funds may be referred to as “provisioning funds,” or “trust funds,”

among other names. These funds are often held in third party banks, and host governments may be

designated as beneficiaries or otherwise given a senior claim over these funds to satisfy

decommissioning costs.

113

The account controls and security mechanisms created to govern these

funds are discussed at greater length in 4.2.3: Designated Funds, below.

Jurisdictions that adopt a “designated fund” model must also address the allocation of

liability if reserved funds do not meet actual decommissioning expenses. States take a variety of

approaches to this issue. A 2003 Nigerian contract analyzed for this report, for example, explicitly

makes the private partner responsible for any shortfall (or surplus) arising from the

decommissioning or abandonment operations.

114

A 2006 Angolan contract, in contrast, simply

requires the parties to renegotiate to “agree on the method of covering the additional costs” where

preestablished decommissioning funds “are insufficient to cover the abandonment and

decommissioning costs.”

115

At the other end of the spectrum, some oil companies entirely disclaim

any contractual or statutory duties to make up decommissioning fund shortfalls.

4.2 Guarantee, Bonding, and Security Arrangements

Decommissioning offshore oil and gas infrastructure can be a laborious and expensive

process.

116

As decommissioning usually occurs at the end of infrastructure’s economic life, when

113

Luciana Braga & Helder Pinto Jr., The Financial Aspects of Offshore Decommissioning and Brazilian Regulatory System in the

Light of the Transnational Legal Order 423, 443, 15 J. WORLD ENERGY L. & BUS. (Sept. 5, 2022).

114

Nigerian National Petroleum Corporation, Shell Petroleum Development Company of Nigeria Ltd., Nigerian Agip Oil

Company Ltd., Elf Petroleum Nigeria Ltd., and Universal Energy Resources Limited, Farmout Agreement, 2003, Article

14, https://resourcecontracts.org/contract/ocds-591adf-6921063233/view#/pdf.

115

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), Vaalco Angola (Kwanza) Inc.,

Sonangol Pesquisa e Produção S.A., InterOil Exploration and Production ASA, Production Sharing Agreement, 2006,

Article 28.4, https://resourcecontracts.org/contract/ocds-591adf-3664745125/view#/pdf.

116

“Though worldwide estimates vary greatly, on an average, removing a complete platform in shallow waters such as in

the Gulf of Mexico may cost [USD] 15 million to [USD] 20 million. Removing structures from deep water, as in the North

Sea, could cost between [GBP] 30 million for smaller platforms and [GBP] 200 million for larger structures.” Rajesh

Chhabara, Offshore Oil Rigs: Can Decommissioning Ever Be Green?, REUTERS EVENTS (Sept. 1, 2009),

https://www.reutersevents.com/sustainability/stakeholder-engagement/offshore-oil-rigs-can-decommissioning-ever-be-

green

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

operating entities may lack cash flows to offset these expenses, states apply a wide variety of

economic tools to ensure that the cost of decommissioning is borne by the responsible party. Most

of these tools can be grouped into three categories: (1) self-insurance and asset pledges, (2) third-

party guarantees, and (3) designated funds.

4.2.1 Self-Insurance and Asset Pledges

Some jurisdictions, like Australia

117

and Brazil,

118

allow companies with anticipated

decommissioning obligations to provide self-insurance. These governments or their concessionaires

may either waive security obligations entirely for private companies with a high enough equity

value, or else allow these companies to secure their decommissioning obligations through priority

pledges of their assets.

119

Brazil, which allows companies to choose their security mechanisms from

a wide array of financial instruments, has created a special category of decommissioning asset

pledge tied to the value of a company’s offshore oil and gas exploration rights. Under Brazilian law,

companies that hold exploration and production rights in multiple oil and gas fields can secure their

decommissioning obligations in one field by pledging their rights over the offshore field offers oil

or gas production from another field . . . as a guarantee of decommissioning costs.”

120

4.2.2 Third-Party Guarantees

Jurisdictions may also require parties to secure their decommissioning obligations through

insurance, parent company guarantees, letters of credit, or other third-party financial instruments.

These economic instruments can take a staggering array of forms, and may be subject to complex

and detailed technical restrictions. Brazil, for example, allows private companies to secure their

offshore decommissioning obligations through letters of credit and insurance bonds issued by

117

Offshore Petroleum and Greenhouse Gas Storage Act 2006 S 571(2) (Austl.).

118

Bruno Belchior & Bárbara Leite, Abandonment and Decommissioning, BRAZIL ENERGY J. 7 (May 2022),

https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2022/05/brazil-energy-journal--may--

abandonment-and-decommissioning.pdf.

119

These self-insurance regimes can pose evident risks in the event of a rapid phase-out. See Section 5.3.1: “Gaps, Risks,

and Areas for Exploration: Self-Insurance and Collateral Risk.”

120

Luciana Braga & Helder Pinto Jr., The Financial Aspects of Offshore Decommissioning and Brazilian Regulatory System in the

Light of the Transnational Legal Order 423, 427, 15 J. WORLD ENERGY L. & BUS. (Sept. 5, 2022).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

financial institutions that are authorized to operate in (or have affiliates who operate in) Brazil.

121

These instruments are subject to detailed requirements, including minimum durations and risk

ratings.

122

One jurisdiction that combines both mandatory and voluntary third-party guarantees is

Norway. While Norway does not have standardized decommissioning security structures,

Norway’s Petroleum Act allows the Ministry of Petroleum and Energy to require a licensee to

provide security, either when the license is granted or at any time afterwards.

123

In practice, and at a

minimum, the ministry “will require any licensee that has a parent company to provide an unlimited

parent company guarantee” conforming to a model form.

124

In addition, a market for voluntary

decommissioning insurance products has arisen following Norway’s introduction of trailing liability

(see 3.1.2: “Trailing Liability”). Under Norwegian law, if an offshore petroleum license or interest

has been transferred to a new holder, “the assignor shall be alternately liable for financial

obligations” in proportion to their previously owned share if the costs “are not covered by the

licensee or another responsible party.”

125

Because assignors remain indefinitely liable for the

decommissioning obligations of their assignees, parties selling their interest in an offshore facility

often negotiate some form of security agreement, guarantee, or bonding arrangement in their asset

transfer agreements to limit their own open-ended liability.

126

In addition to providing cash to backstop against the underlying company’s insolvency,

third-party guarantees add a layer of private governance that “prevent[s] insolvency from

121

Bruno Belchior & Bárbara Leite, Abandonment and Decommissioning, BRAZIL ENERGY J. 8 (May 2022),

https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2022/05/brazil-energy-journal--may--

abandonment-and-decommissioning.pdf.

122

Id.

123

Act 29 November 1996 No. 72 Relating to Petroleum Activities § 10-7 (Nor.).

124

Frode Vareberg, Parent Company Guarantee Requirement for Future Decommissioning Cost in Corporate Transfers on NCS,

LEXOLOGY (Dec. 18, 2017), https://www.lexology.com/commentary/energy-natural-resources/norway/simonsen-vogt-

wiig-advokatfirma/parent-company-guarantee-requirement-for-future-decommissioning-cost-in-corporate-transfers-on-

ncs.

125

Act 29 November 1996 No. 72 Relating to Petroleum Activities § 5-3 (Nor.).

126

Catherine Bannet, Norway, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL

AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 541, 554 (Eduardo G. Pereira, Alexandra Wawryk, Heike

Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

undermining the deterrent effect of liability rules.”

127

If a company is winding down, nearing

insolvency, or otherwise facing post-decommissioning liability in excess of its expected future assets,

it may have little incentive to conduct decommissioning in the safest and most effective manner.

128

A third-party insurer or guarantor, however, will be motivated to ensure that the underlying

company adequately manages its risks.

129

However, the ability of these third-party guarantors to

reduce risk ex ante may “depend critically on the efforts of insurers—or other financial guarantors—

to ‘regulate’ risky activities.”

130

4.2.3 Designated Funds

As discussed in Section 4.1.2 above, jurisdictions may also require offshore operators to

provide security by establishing and funding a dedicated decommissioning account.

131

Indonesia’s

“designated fund” regulations provide a good example of the various payment and security

mechanisms a jurisdiction may implement to protect designated funds. Designated

decommissioning funds have been a longstanding feature of Indonesian decommissioning law, and

are currently enshrined in a comprehensive set of regulations and related guidelines.

132

From the

beginning of an offshore asset’s productive life, its operator must deposit decommissioning funds

into a designated account over a set period of time based on an estimate of anticipated abandonment

and site restoration (“ASR”) costs.

133

These funds are subject to significant and specific controls.

“ASR Funds must be deposited in a joint account held by the relevant regulator, SKK Migas, and the

127

Jeffrey Kehne, Encouraging Safety Through Insurance-Based Incentives: Financial Responsibility for Hazardous Wastes, 96

YALE L.J. 403, 405 (1986).

128

“[A]n undercapitalized firm engaged in a risky activity can be expected to cut corners on safety expenditures with the

expectation that any damages exceeding the firm's net worth will be borne by third parties.” Id.

129

Id. at 407.

130

Id. at 406.

131

Luciana Braga & Helder Pinto Jr., The Financial Aspects of Offshore Decommissioning and Brazilian Regulatory System in the

Light of the Transnational Legal Order 423, 443, 15 J. WORLD ENERGY L. & BUS. (Sept. 5, 2022).

132

Richard Nelson, Lachlan Clancy, Zoë Bromage, & Andy Kelana, Energy: Oil and Gas 2022—Indonesia: Law and Practice,

CHAMBERS & PARTNERS (Aug. 9, 2022), https://practiceguides.chambers.com/practice-guides/comparison/685/9300/14961-

14966-14977-14991-14994-15001.

133

Anton Latief, Indonesia, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND

GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 407, 413, 421–22 (Eduardo G. Pereira, Alexandra Wawryk, Heike

Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

contractor in an Indonesian state-owned bank.”

134

Prior to 2018, SKK Migas guidelines only allowed

the contractor to withdraw these funds at the end of decommissioning, “following approval of

[decommissioning] completion.”

135

In 2018 SKK Migas released revised working guidelines that

allow the contractor to withdraw funds progressively throughout the course of decommissioning,

subject to a budget approved by SKK Migas and on approval from Indonesia’s Directorate General

for Oil and Gas.

136

Jurisdictions may also provide special legal mechanisms to ensure that decommissioning

funds cannot be used for non-decommissioning purposes. For example, while the United Kingdom

does not universally require private oil companies to establish designated decommissioning funds,

if a contract or regulatory action creates such a fund, the United Kingdom’s Petroleum Act protects

decommissioning funds from insolvency regimes, “or any other enactment or rule of law,” that

would “prevent or restrict” those assets from being applied for decommissioning expenses.

137

4.3 Tax Treatment of Decommissioning

Tax regimes interact with offshore oil and gas decommissioning liability in a number of

ways. These interactions are driven by two features of offshore decommissioning: decommissioning

is very expensive, and, by definition, it generally occurs at the end of the asset’s usable life “when

production, and profit generation, has ceased.”

138

“The combination of very costly obligations for

operators at a time when operating income is trickling to a stop may present some unfortunate

incentives.”

139

This section addresses tax mechanisms that impact the costs and allocation of

134

Gabriel Procaccini, Paul Greening, & Eduardo Canales, The Coming Decommissioning Wave in Southeast Asia: What to

Expect and the Relevance of Experiences in the North Sea and U.S. Gulf of Mexico, AKIN GUMP (Apr. 2, 2020),

https://www.akingump.com/en/insights/blogs/speaking-energy/the-coming-decommissioning-wave-in-southeast-asia-

what-to-expect-and-the-relevance-of-experiences-in-the-north-sea-and-us-gulf-of-mexico.

135

Anton Latief, Indonesia, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND

GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 407, 427 (Eduardo G. Pereira, Alexandra Wawryk, Heike Trischmann,

Catherine Banet & Keith B. Hall eds. 2020).

136

Id.

137

Petroleum Act 1988, Ch. 17, § 38A(6) (Eng.).

138

Robert Hodges, International Taxation, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND COMPARATIVE PRACTICE 99

(Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

139

Rune Tjomsås Andersen & Ole Kirkvaag, The Tax Treatment of Decommissioning: The Example of Norway, in THE

REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

decommissioning liability. These mechanisms include tax rules around the deductibility of

decommissioning costs, dedicated industry taxes to defray government decommissioning expenses,

and other, more unusual structures, like Brazil’s deferred tariff regime, that may create significant

tax obligations during decommissioning.

4.3.1 Deduction of Decommissioning Costs

Every jurisdiction that allows companies to deduct operating expenses from their taxable

income must decide how decommissioning costs should be treated. As a general matter, regimes

that apply an income tax to offshore oil and gas operations frequently allow private companies to

treat decommissioning costs as tax deductible.

140

Where deductions are permitted for

decommissioning costs, jurisdictions apply one of three models: (1) an “expenditure” model, which

deducts decommissioning costs when the decommissioning expenditures actually occur (primarily

at the end of the facility’s life); (2) an “accrual” model, which deducts decommissioning costs when

the decommissioning liability accrues to the liable party, and (3) a “contribution” model, which

allows liable parties to take a deduction when they pre-fund a designated decommissioning

account.

141

Expenditure models and contribution models are also referred to in the literature as a

“cash basis” model, or a “pre-funded basis” model, respectively.

142

The expenditure model is relatively common, particularly in systems that tax oil and gas

profits on a cash-flow basis.

143

However, while conceptually simple, this practice means that

deductions may be unusable for companies that are no longer generating profits in the taxing

TO OPPORTUNITIES 167 (Eduardo G. Pereira, Alexandra Wawryk, Heike Trischmann, Catherine Banet & Keith B. Hall eds.

2020).

140

The oil supermajor Shell (perhaps somewhat self-servingly) describes this treatment as “ fundamental to regimes that

tax profits” and notes that “[decommissioning costs in the oil and gas industry are treated consistently as a business

expense.” Tax Contribution Report 2020: Case Study—Tax Treatment of Decommissioning Costs in Different Jurisdictions, SHELL

(2020), https://reports.shell.com/tax-contribution-report/2020/our-business/upstream/case-study-tax-treatment-of-

decommissioning-costs-in-different-jurisdictions.html.

141

UNITED NATIONS HANDBOOK ON SELECTED ISSUES FOR TAXATION OF THE EXTRACTIVE INDUSTRIES BY DEVELOPING COUNTRIES,

UNITED NATIONS 295–301 (2017), https://www.un.org/development/desa/financing/

sites/www.un.org.development.desa.financing/files/2020-03/UN%20Handbook%20on%20Selected %20Issues%20for%

20Taxation%20of%20the%20Extractive%20Industries%20by%20Developing %20Countries.pdf.

142

Robert Hodges, International Taxation, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND COMPARATIVE PRACTICE 99,

100 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

143

Id.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

jurisdiction. Some jurisdictions “mitigate this through allowing the decommissioning loss to be set

off against profits elsewhere in the group or against the profits of a certain number of years before

cessation.”

144

This structure may also encourage companies to initiate decommissioning early, where

possible, so that they can use their decommissioning “losses” to offset the tax on generated profits.

145

The accrual and contribution models create more usable deductions for the liable companies, but

require detailed rules addressing the amount and timing of decommissioning obligations.

146

Along with defraying the burden of decommissioning, tax regimes may be used to directly

fund government decommissioning expenses. When offshore oil companies collapse with unfunded

decommissioning obligations, for example, governments may impose emergency taxes on the rest

of the industry to cover the liabilities. Australia deployed this strategy in 2020 to deal with

decommissioning liability from the collapse of an offshore petroleum company (see Box 4: Australia's

Special Decommissioning Levy).

144

UNITED NATIONS HANDBOOK ON SELECTED ISSUES FOR TAXATION OF THE EXTRACTIVE INDUSTRIES BY DEVELOPING COUNTRIES,

UNITED NATIONS 306 (2017), https://www.un.org/development/desa/financing/

sites/www.un.org.development.desa.financing/files/2020-03/UN%20Handbook%20on%20Selected %20Issues%20for%

20Taxation%20of%20the%20Extractive%20Industries%20by%20Developing %20Countries.pdf.

145

Id. at 307.

146

Id. at 309–10.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

Box 4: Australia's Special Decommissioning Levy

4.3.2 End-of-Life Tax Liabilities

Decommissioning may also raise tax issues and liabilities unrelated to the decommissioning

expenses themselves. For example, Brazil has a specific and long-standing customs tax regime,

REPETRO, which suspends tariffs on goods “directly destined for and used in the exploration and

production of oil and gas.”

147

If an offshore facility uses materials that benefited from this

suspension, the suspended taxes must be paid upon decommissioning unless the materials are (1)

reused in another exempted manner, (2) re-exported, or (3) destroyed.

148

Delayed-liability regimes

147

Gabriela Roque, Fernanda Delgado de Jesus, Pedro Henrique Gonçlaves Neves, & Eduardo G. Pereira, Brazil, in THE

REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION

TO OPPORTUNITIES 277, 289 (Eduardo G. Pereira, Alexandra Wawryk, Heike Trischmann, Catherine Banet & Keith B. Hall

eds. 2020).

148

Id.

AUSTRALIA’S SPECIAL DECOMMISSIONING LEVY

In 2015 two Australian energy companies, Woodside Energy Ltd. (“Woodside”)

and Talisman Oil & Gas Pty. Ltd. (“Talisman”), were joint operators of a floating

offshore petroleum installation, the Northern Endeavour, which was nearing the end of

its life.

In September 2015 a newly formed company, Northern Oil and Gas Australia

(“NOGA”) acquired Talisman, which in turn acquired Woodside’s rights in the venture,

and Northern Endeavor.

NOGA, which had a sole director, intended to extend the life

of the Northern Endeavor. However, following a series of dangerous accidents on the

Northern Endeavor, the relevant Australian regulator suspended NOGA’s production

licenses. After this suspension was extended, NOGA and its related companies went

into voluntary bankruptcy administration.

Following the collapse of NOGA, the Australian government passed an

emergency levy on offshore oil and gas production to fund NOGA’s decommissioning

obligations, in the face of significant industry protest.

1 STEVE WALKER, REVIEW OF THE CIRCUMSTANCES THAT LED TO THE ADMINISTRATION OF THE NORTHERN

OIL AND GAS AUSTRALIA (NOGA) GROUP OF COMPANIES (Commonwealth of Australia June 2020),

https://www.industry.gov.au/sites/default/files/2020-08/review-of-circumstances-that-led-to-the-

administration-of-noga-executive-summary-and-recommendations.pdf.

2 Id.

3 Id.

4 Mike Foley & Nick Toscano, Woodside Hits Out at Rig Clean-Up Levy as Industry Rift with

Government Widens, SYDNEY MORNING HERALD (July 18, 2021),

https://www.smh.com.au/politics/federal/woodside-hits-out-at-rig-clean-up-levy-as-industry-

rift-with-government-widens-20210715-p58a20.html.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

like REPETRO might create balloon payment obligations that arise during the process of

decommissioning, when operators are likely to lack revenue streams or valuable assets.

4.3.3 Tax Stabilization in Contracts

As discussed in Section Error! Reference source not found. above, stabilization clauses,

which limit the application of new or modified laws to contracts that have already been executed,

may freeze the tax regime applicable to the project and prevent any changes to applicable petroleum

taxes, royalties, rents, or tariffs. Contracts analyzed for this report from Angola

149

and Indonesia

150

contained stabilization clauses that might limit changes to applicable tax regimes.

5. GAPS, RISKS, AND AREAS FOR EXPLORATION

The legal structures, regulatory regimes, and contractual mechanisms reviewed for this

report contain a number of features that may create uncertainty or risk for host jurisdictions in a

rapid phase-out scenario—that is, in a scenario in which offshore hydrocarbon assets suffer either

(1) “economic stranding” from a change in the price of oil or gas or increase in the cost of extraction

or (2) “regulatory stranding” from legal restrictions on offshore oil and gas activity.

151

This section

highlights several gaps, risks, and inconsistencies in the regulatory and contractual regimes

reviewed for this report. These risks are categorized into five areas: (1) responsibility for

decommissioning, (2) decommissioning funding structures, (3) guarantee, bonding, and security

arrangements, (4) tax treatment of decommissioning, and (5) stabilization clauses. These risks are

discussed at a general level, and the risks posed by any individual facility may vary widely based

on the terms of any relevant contracts and the value and quality of decommissioning assurances,

collateral, and other security mechanisms. Instead, this section highlights structural weaknesses in

decommissioning laws that may present serious risks to host jurisdictions in a rapid phase-out

scenario.

149

See infra Section 7.4.6: “Angola: Stabilization Clauses.”

150

See infra Section 10.4.6: “Indonesia: Stabilization Clauses.”

151

See Stranded Assets, CARBON TRACKER INITIATIVE (Aug. 23, 2017), https://carbontracker.org/terms/stranded-assets/.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

5.1 Responsibility for Decommissioning

In a rapid phase-out scenario, some jurisdictions may face a simple, but underexplored risk:

they may have no decommissioning plans in place. Jurisdictions vary in their approaches to

planning and budgeting for decommissioning. In Brazil, for example, private companies must

provide a decommissioning plan as part of their overall field development plan.

152

In contrast,

Norway only requires license holders to draft a decommissioning plan between 2 and 5 years before

their license expires.

153

This inconsistency may create a significant amount of uncertainty in a rapid

phase-out scenario where jurisdictions are forced to accelerate their decommission planning

timelines, and jurisdictions that adopt Norway’s approach may struggle to develop effective

decommissioning plans.

5.2 Decommissioning Funding Structures

As previously discussed, jurisdictions tend to finance decommissioning using either a pay-as-

you-go model or a designated fund model. While designated fund models are safer in theory than

pay-as-you-go structures because they reserve and protect specific assets for decommissioning

expenses, they are far from risk-free. One issue repeatedly highlighted in the literature surrounding

offshore decommissioning is that decommissioning costs may change significantly in the decades

between a project’s initial construction and its decommissioning. Jurisdictions that attempt to

estimate decommissioning expenses at the beginning of a project’s productive life may make

inaccurate evaluations. Many jurisdictions attempt to avoid this problem through periodic review

of decommissioning resources and decommissioning plans. A 2010 contract entered into by Brazil,

for example, requires the parties to regularly reevaluate the adequacy of decommissioning funds

throughout the relevant field’s production phase.

154

Jurisdictions may also require independent

evaluations of decommissioning costs, rather than rely on private company-produced estimates. In

152

OVERVIEW OF INTERNATIONAL OFFSHORE DECOMMISSIONING REGULATIONS 199, INTERNATIONAL ASSOCIATION OF OIL AND

GAS PRODUCERS (July 2017), https://www.iogp.org/bookstore/product/overview-of-international-offshore-

decommissioning-regulations-volume-1-facilities/.

153

Catherine Bannet, Norway, in THE REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL

AND GAS INDUSTRY: FROM OBLIGATION TO OPPORTUNITIES 541, 550 (Eduardo G. Pereira, Alexandra Wawryk, Heike

Trischmann, Catherine Banet & Keith B. Hall eds. 2020).

154

Federal Government of Brazil, Petróleo Brasileiro S.A. Petrobras, Concession, 2010, Article 14.9,

https://resourcecontracts.org/contract/ocds-591adf-9691553720/view#/pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

the United States decommissioning cost estimates are produced by an independent regulator, the

Bureau of Safety and Environmental Enforcement, which provides these estimates to the leasing

agency, the Bureau of Ocean Energy Management, as a tool to set decommissioning security

requirements.

155

Designated fund models also face a unique risk from early asset decommissioning. Many

jurisdictions with designated fund structures, including Indonesia, Malaysia, and Mexico, allow

companies to make contributions to their decommissioning funds over a period of time.

156

Mexico,

for example, requires contractors to make quarterly contributions to an abandonment or

decommissioning trust based on a calculation considering “the estimated production for the

applicable years; the remaining proven reserves; and the remaining amount of decommissioning

and abandonment costs at the beginning of each year of calculation.”

157

This gradual funding

mechanism, however, might mean that insufficient funds would be available to decommission a

field before the end of its operating life.

5.3 Guarantee, Bonding, and Security Arrangements

5.3.1 Self-Insurance and Collateral Risk

Many jurisdictions analyzed for this report allow oil companies that meet certain financial

strength metrics to self-insure their decommissioning obligations. Some jurisdictions, like the United

States, use metrics that include equity value and projections of future oil or gas production,

158

which

could be highly misleading in the event of an industry-wide downturn. This poses an obvious fiscal

155

OFFSHORE OIL AND GAS: UPDATED REGULATIONS NEEDED TO IMPROVE PIPELINE OVERSIGHT AND DECOMMISSIONING, GAO

(Mar. 2021), https://www.gao.gov/assets/gao-21-293.pdf.

156

Gabriel Procaccini, Paul Greening, & Eduardo Canales, The Coming Decommissioning Wave in Southeast Asia: What to

Expect and the Relevance of Experiences in the North Sea and U.S. Gulf of Mexico, AKIN GUMP (Apr. 2, 2020),

https://www.akingump.com/en/insights/blogs/speaking-energy/the-coming-decommissioning-wave-in-southeast-asia-

what-to-expect-and-the-relevance-of-experiences-in-the-north-sea-and-us-gulf-of-mexico; Anton Latief, Indonesia, in THE

REGULATION OF DECOMMISSIONING, ABANDONMENT AND REUSE INITIATIVES IN THE OIL AND GAS INDUSTRY: FROM OBLIGATION

TO OPPORTUNITIES 407, 413, 421–22 (Eduardo G. Pereira, Alexandra Wawryk, Heike Trischmann, Catherine Banet & Keith

B. Hall eds. 2020).

157

Carlos de Maria y Campos, Antonio Borja, Germán Fernández, Energy: Oil and Gas 2022—Mexico: Law and Practice,

CHAMBERS & PARTNERS (June 21, 2022), https://practiceguides.chambers.com/practice-guides/energy-oil-gas-

2022/mexico/trends-and-developments.

158

Keith B. Hall, Decommissioning of Offshore Oil and Gas Facilities in the United States, 14 CHARLESTON L. REV. 437, 456

(2020).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

risk in a rapid phase-out scenario. End-of-life fiscal assurance structures that are “conditional upon

the financial strength of the operator or some third party” are inherently vulnerable to the financial

position of the underlying companies, “[u]nless specific and sufficient assets or funds are ring-

fenced from the reach of their creditors.”

159

However, governments may struggle to change self-insurance or collateral requirements in

response to an ongoing economic downturn. During “the oil price collapse of 2014–2016,” for

instance, the U.S. Bureau of Ocean Energy Management recognized the inadequacy of the security

that companies had provided, but “did not fully enforce” existing financial assurance requirements

because the Bureau “was concerned that fully enforcing [the standard] would have led to an increase

of bond demands that, in turn, would have contributed to an increase in bankruptcy filings.”

160

Jurisdictions that permit self-insurance may face similar difficulties in a rapid phase-out scenario.

159

Colin Mackie, Laurel Besco, Rethinking the Function of Financial Assurance for End-of-Life Obligations, 50 ENVTL. L. REP.

(ELI) 10573, 10601 (2020) (emphasis original).

160

Notice of Proposed Rulemaking on Risk Management, Financial Assurance and Loss Prevention, 85 Fed. Reg. 65,904,

65,906 (Oct. 16, 2020), https://www.boem.gov/sites/default/files/documents/about-boem/regulations-guidance/federal-

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

Box 5: Self-Bonding in the U.S. Coal Industry

Some jurisdictions allow private companies to secure their decommissioning obligations by

posting collateral. The value of some types of collateral, like the surety bonds and government

securities favored under United States regulations,

161

may be relatively isolated from the oil and gas

industry. Other types of collateral, however, may be closely linked to the market value and legal

status of oil and gas. For example, Brazil allows companies that hold exploration and production

rights in multiple oil and gas fields to secure their decommissioning obligations in one field by

pledging their rights over the offshore field offers oil or gas production from another field . . . as a

161

30 C.F.R. § 556.902(e).

SELF-BONDING IN THE U.S. COAL INDUSTRY

In the United States, the Surface Mining Control and Reclamation Act of 1977

(“SMCRA”) was intended to ensure that financial resources were available to reclaim

mines at the end of their commercial lives.

SMCRA required mine operators to post

financial assurance based on the expected future cost of reclaiming their mined land,

and authorized the coal mine regulator of each State to “set its own criteria for

acceptable forms of surety.”

However, in the wake of a series of bankruptcies between

2015 and 2016 that claimed companies that “accounted for nearly half of [the United

States’] coal production,” U.S. regulators realized that self-bonding of decommissioning

liability posed significant and correlated default risks to host governments.

Subsequent

investigations have suggested that the security posted by U.S. coal mines is woefully

inadequate to cover the actual anticipated costs of reclaiming abandoned mines.

1 Denise A. Dragoo & James P. Allen, Coal Mine Closure, Reclamation and Financial Assurance, Rocky

Mountain Mineral Law Foundation Paper No. 7 (Nov. 5-6, 2009).

2 Id.

3 See Mark Olalde, Crackdown on Coal Mine “Self-Bonds” Stalls under Trump, CLIMATE HOME NEWS

(Mar. 15, 2018), https://www.climatechangenews.com/2018/03/15/crackdown-coal-mine-self-bonds-

stalls-trump/ (discussing the practice of self-bonding for coal decommissioning liabilities).

4 Id.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

guarantee of decommissioning costs.”

162

The value of this collateral is obviously closely linked to the

value of the underlying oil and gas, and this type of collateral may devalue overnight in a rapid

phase-out scenario.

5.3.2 Correlated Guarantee Risk

Many jurisdictions analyzed for this report allow companies to secure their decommissioning

obligations through third-party financial assurance mechanisms, like decommissioning bonds,

insurance products, letters of credit, or parent-company guarantees. These instruments are often

subject to detailed credit rating requirements and other risk evaluation processes.

163

However, these

instruments may create significant and unanticipated risk in a rapid phase-out scenario if the third

parties underwriting them face correlated exposure to the guaranteed activities. This could happen

either because the economic health of a third-party guarantor like a parent company is directly tied

to the economic health of the industry, or because an insurers or other underwriter concentrates risks

that would otherwise be spread across an entire sector.

In the United States, for example, the Surface Mining Control and Reclamation Act

(“SMCRA”) requires coal mine operators to post bonds for decommissioning and reclamation

costs.

164

However, a 2022 investigation by Bloomberg and NPR revealed that Indemnity National

Insurance Co., a small and poorly diversified specialty insurer, underwrites the decommissioning

obligations of “almost one-fifth of the US coal mining industry.”

165

Regulators and industry

researchers worry that that “[m]ultiple mine bankruptcies at the same time could overwhelm

Indemnity,” pushing unfunded reclamation costs onto the public.

166

162

Luciana Braga & Helder Pinto Jr., The Financial Aspects of Offshore Decommissioning and Brazilian Regulatory System in the

Light of the Transnational Legal Order 423, 427, 15 J. WORLD ENERGY L. & BUS. (Sept. 5, 2022).

163

See supra Section 4.2.2: “Third-Party Guarantees” (discussing Brazil’s standards for third-party financial instruments

provided as decommissioning security).

164

See George Cameron Coggins and Robert L. Glicksman, General SMCRA Regulation, in PUBLIC NATURAL RESOURCES

LAW (2nd ed. Feb. 2023).

165

Leslie Kaufman & Will Wade, The Tiny Insurance Company Standing between Taxpayers and a Costly Coal Industry Bailout,

BLOOMBERG (Nov. 8, 2022), https://www.bloomberg.com/news/features/2022-11-08/the-tiny-insurance-company-

standing-between-taxpayers-and-a-costly-coal-industry-bailout.

166

Id.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

5.4 Tax Treatment of Decommissioning

Given the large direct expenses involved in decommissioning offshore oil and gas facilities,

tax liability may be something of an afterthought for policymakers contemplating the large-scale

decommissioning of an offshore oil and gas field. However, the tax treatment of decommissioning

costs in a rapid phase-out scenario may create unexpected liabilities, shortfalls, and default risks

throughout the decommissioning process. The most obvious default risk comes if a jurisdiction’s

laws create end-of-life tax liability for a company engaged in offshore oil and gas decommissioning.

For example, Brazil’s REPETRO regime may require companies engaged in decommissioning to pay

deferred tariffs if decommissioned materials are recycled in Brazil for uses that are not tax-exempt.

167

(See Section 4.3.2: “End-of-Life Tax Liabilities”). These balloon payments at the end of an asset’s life

might face a high non-payment risk if the liable parties lack assets to cover these liabilities.

Tax deduction models may also create decommissioning risk in a rapid phase-out scenario.

First, changing the timing of tax deductions may change companies’ ability to afford

decommissioning. Put simply, a decommissioning process will cost an operator more if it cannot use

its tax deductions efficiently.

168

However, a premature decommissioning process driven by a rapid

collapse of offshore oil and gas might have a silver lining for “expenditure model” jurisdictions, if it

forces companies to decommission in a year when they have production profits against which they

can offset their costs.

169

Governments may also face unexpected liability if their tax regime allows decommissioning

operators to receive not just deductions but tax refunds as a result of their decommissioning costs.

Two common mechanisms, decommissioning tax credits and “carry back” provisions, could force

governments to disgorge refunds in the event of the rapid decommissioning of multiple offshore

installations. The scale of these tax refunds can be considerable. For example, in 2020 Shell received

167

See supra Section 4.3.2: “End-of-Life Tax Liabilities.”

168

UNITED NATIONS HANDBOOK ON SELECTED ISSUES FOR TAXATION OF THE EXTRACTIVE INDUSTRIES BY DEVELOPING COUNTRIES,

UNITED NATIONS 306 (2017), https://www.un.org/development/desa/financing/

sites/www.un.org.development.desa.financing/files/2020-03/UN%20Handbook%20on%20Selected %20Issues%20for%

20Taxation%20of%20the%20Extractive%20Industries%20by%20Developing %20Countries.pdf.

169

Indeed, one risk highlighted in the literature around expenditure models is that they tend to encourage premature

decommissioning for exactly this reason. Id. at 307.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

a GBP 67.5 million tax refund from the United Kingdom by using its 2020 decommissioning expenses

“to offset historical tax” through a carry-back mechanism.

170

5.5 Stabilization Clauses

A large body of literature addresses the effects of stabilization clauses in international oil and

gas contracts,

171

and extensive discussion of stabilization agreements lies outside of the scope of this

paper. However, it is worth noting that stabilization clauses may create a barrier to the early

decommissioning of oil and gas infrastructure. For example, several Angolan offshore oil and gas

contracts analyzed for this report contain stabilization clauses that require Angola to restore the

“rights, obligations, and forecasted benefits” of those contracts if “any change in the provisions of

any law, decree, or regulation in force in [Angola] . . . adversely affects the obligations, rights, and

benefits” of the parties.

172

These stabilization clauses may create risks for governments where early

decommissioning is driven by the law or public policy of the host jurisdiction.

173

In fact, the OECD

Guiding Principles for Durable Extractive Contracts advise against the use of non-fiscal stabilization

clauses and recommend that, when governments decide that fiscal stabilization clauses are

necessary, these clauses should be “designed to minimise the general tax policy impact, by limiting

its scope to specific key fiscal terms (not all fiscal terms), such as agreed rates, for a specific period

170

Tax Contribution Report 2020: Case Study—Tax Treatment of Decommissioning Costs in Different Jurisdictions, SHELL (2020),

https://reports.shell.com/tax-contribution-report/2020/our-business/upstream/case-study-tax-treatment-of-

decommissioning-costs-in-different-jurisdictions.html.

171

See, e.g., Martin Dietrich Brauch, Perrine Toledano, and Cody Aceveda. Allocation of Climate-Related Risks in Investor–

State Mining Contracts, COLUMBIA CENTER ON SUSTAINABLE INVESTMENT (June 28, 2022),

https://scholarship.law.columbia.edu/sustainable_investment_staffpubs/224/.

172

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 20 Ltd.,

Sonangol Pesquisa E Produção S.A., BP Exploration Angola (Kwanza Benguela) Limited, China Sonangol International

Holding Limited, Production Sharing Agreement, 2012, Article 37, https://resourcecontracts.org/contract/ocds-591adf-

0014595575/view#/pdf; see also Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.),

Vaalco Angola (Kwanza) Inc., Sonangol Pesquisa e Produção S.A., InterOil Exploration and Production ASA, Production

Sharing Agreement, 2006, Article 37, https://resourcecontracts.org/contract/ocds-591adf-3664745125/view#/pdf (same);

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 21 Ltd., Sonangol

Pesquisa e Produção S.A., Nazaki Oil and Gáz S.A., Alper Oil Lda, Service Contract, 2010, Article 36,

https://resourcecontracts.org/contract/ocds-591adf-0839745741/view#/pdf (same).

173

See Martin Dietrich Brauch, Climate Action Needs Investment Governance, Not Investment Protection and Arbitration,

COLUMBIA CENTER ON SUSTAINABLE INVESTMENT (Mar. 15, 2022), https://ccsi.columbia.edu/news/climate-action-needs-

investment-governance-not-investment-protection-isds (discussing risks created by treaty frameworks that, like

stabilization clauses, protect the “expectations” of fossil fuel investors against the transition away from fossil fuels).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

of time (not indefinitely), and possibly by applying a stability premium on tax rates.”

174

In evaluating

their decommissioning policies, governments should be aware that stabilization clauses in investor-

state oil and gas contracts may shift or create additional burdens around early offshore

decommissioning.

6. CONCLUSION AND RECOMMENDATIONS

The growing urgency of climate action in line with the Paris Agreement, coupled with the

increasing adoption of renewable energy and energy-efficient technologies, is likely to strand

thousands of offshore oil and gas installations across the globe.

175

Governments, as the

“decommissioners of last resort” under national and international frameworks, are heavily

incentivized to ensure that the enormous costs of decommissioning this infrastructure fall on fossil

fuel producers, rather than on the public.

176

Countries with significant offshore oil and gas industries

have created sophisticated legal frameworks to assign liability for decommissioning expenses and

ensure that oil companies fulfil their offshore decommissioning obligations.

However, even jurisdictions with extensive decommissioning experience and well-tested

decommissioning regulations may be unprepared for the industry-wide decline associated with a

rapid phase-out of offshore oil and gas production. To protect the public in a rapid phase-out

scenario, and to ensure that fossil fuel companies meet their decommissioning obligations,

governments, policymakers, and industry participants must take four key steps:

1. Create and regularly update comprehensive decommissioning plans. Some jurisdictions

prepare decommissioning plans only when an installation or field is approaching the end of

its usable life.

177

This approach may create bottlenecks and unnecessary delays in a rapid

phase-out scenario, where offshore facilities may need to be quickly decommissioned long

before the ends of their previously anticipated lifespans. To prepare for a rapid phase-out,

174

OECD, GUIDING PRINCIPLES FOR DURABLE EXTRACTIVE CONTRACTS ¶54, OECD DEVELOPMENT POLICY TOOLS, OECD

PUBLISHING, PARIS (2020), https://doi.org/10.1787/55c19888-en.

175

See supra Section 1: “Introduction.”

176

See supra Section 2.1: “International Law.”

177

See supra Section 5.1: “Gaps, Risks, and Areas for Exploration: Responsibility for Decommissioning.”

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

governments should require the operators of all offshore oil and gas facilities to create and

regularly update comprehensive decommissioning plans.

2. Reexamine decommissioning security mechanisms. Legal mechanisms like collateral

packages, guarantees, and funding structures are often predicated on assumptions that oil

and gas assets will remain valuable and that oil companies will remain solvent. In the face of

the transition away from fossil fuels, these assumptions may be incorrect.

178

Policymakers

and industry participants should examine all security mechanisms to ensure that they are

compatible with a rapid phase-out scenario. Evaluators should pay particular attention to

three categories of security mechanism:

a. Guarantees, insurance, self-insurance, and third-party pledges provided by entities

that are heavily exposed to the oil and gas industry may be particularly vulnerable to

the systemic devaluation of oil and gas assets.

b. Collateral packages that depend on the value of concession agreements or

unextracted fossil fuel assets may lose value in a field-wide rapid phase-out.

c. Decommissioning funds that are funded gradually over the course of an asset’s

anticipated life may be underfunded if assets are decommissioned early.

3. Evaluate and plan for the tax consequences of industry-wide decommissioning. Offshore

decommissioning is an expensive obligation that occurs at the end of a facility’s economic

life, and may significantly affect the economics of decommissioning a particular facility.

179

Policymakers and industry participants who are planning for decommissioning

expenditures should ensure that they are aware of, and prepared for, the tax implications of

a rapid phase-out affecting the entire oil and gas industry.

4. Evaluate and modify stabilization clauses to accommodate a rapid phase-out. In evaluating

their decommissioning policies, governments should be aware that stabilization clauses may

shift or create additional burdens around early offshore decommissioning.

180

To the extent

possible, governments should consider modifying stabilization clauses in line with

178

See supra Section 5.3: “Gaps, Risks, and Areas for Exploration: Guarantee, Bonding, and Security Arrangements.”

179

See supra Section 4.3: “Tax Treatment of Decommissioning.”

180

See supra Section 5.5: “Gaps, Risks, and Areas for Exploration: Stabilization Clauses.”

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

international best practices to allow them to mandate early asset decommissioning if offshore

assets become legally impaired or otherwise “stranded” by the climate transition.

These recommendations are general, reflecting both the nuanced risks associated with

decommissioning complex infrastructure projects and the multi-jurisdictional nature of this paper.

Policymakers, academics, and industry members should use these recommendations as a

springboard for developing facility-specific and jurisdiction-specific knowledge, plans, and policies.

However, despite these jurisdictional variations, the issues highlighted in this paper should

represent a warning: offshore decommissioning laws must adapt in response to the transition away

from fossil fuels. As oil and gas regulators prepare for the transition, they must act protect the public

from the costs of decommissioning offshore oil and gas infrastructure.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

7. APPENDIX 1: ANGOLA

7.1 Sources of Law

7.1.1 International Law

Angola is a party to UNCLOS,

181

a member of the IMO,

182

and a party to both the London

Convention and its 1996 protocol.

183

7.1.2 National Law

The primary laws governing offshore decommissioning in Angola are the Petroleum

Activities Law (Law 10/04), which broadly governs oil extraction, and the Law on Taxation of Oil

Activities (Law 13/04), which sets tax rules for oil operations.

184

These laws and related oil industry

regulations are enforced by the Ministry of Petroleum.

185

These statutory frameworks have been

supplemented by a number of regulatory decrees, discussed below.

Until 2019 “[a]ll oil and gas exploration and production activities in Angola [were] controlled

by the national oil company, Sociedade Nacional de Combustiveis de Angola E.P. (‘Sonangol’).”

186

In 2019 “Angola transferred concessionaires’ rights from national oil company Sonangol to the

National Agency for Petroleum, Gas and Biofuels (“ANPG”), through Presidential Decree

No. 49/19.”

187

This reorganization established ANPG as the regulator and concessionaire of

181

United Nations Convention on the Law of the Sea, UNITED NATIONS TREATY COLLECTION (n.d.),

https://treaties.un.org/pages/ViewDetailsIII.aspx?src=TREATY&mtdsg_no=XXI-

6&chapter=21&Temp=mtdsg3&clang=_en.

182

Member States, INTERNATIONAL MARITIME ORGANIZATION (n.d.),

https://www.imo.org/en/OurWork/ERO/Pages/MemberStates.aspx.

183

See STATUS OF CONVENTIONS: RATIFICATIONS BY STATE, INTERNATIONAL MARITIME ORGANIZATION (Mar. 22, 2023),

https://wwwcdn.imo.org/localresources/en/About/Conventions/StatusOfConventions/x-Status.pdf.

184

OVERVIEW OF INTERNATIONAL OFFSHORE DECOMMISSIONING REGULATIONS 198, INTERNATIONAL ASSOCIATION OF OIL AND

GAS PRODUCERS (July 2017), https://www.iogp.org/bookstore/product/overview-of-international-offshore-

decommissioning-regulations-volume-1-facilities/.

185

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 227 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

186

OVERVIEW OF INTERNATIONAL OFFSHORE DECOMMISSIONING REGULATIONS 103–04, INTERNATIONAL ASSOCIATION OF OIL

AND GAS PRODUCERS (July 2017), https://www.iogp.org/bookstore/product/overview-of-international-offshore-

decommissioning-regulations-volume-1-facilities/.

187

Angola—Country Commercial Guide, U.S. INTERNATIONAL TRADE ADMINISTRATION (Aug. 5, 2022),

https://www.trade.gov/country-commercial-guides/angola-oil-and-gas.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

upstream concessions, auctions, and production contracts, while “Sonangol began restructuring to

focus on its core upstream, midstream and downstream businesses as operator.”

188

Private oil and gas companies that operate in Angola do so pursuant to a variety of contracts

(often Production Sharing Agreements, or “PSAs”) with the concessionaire (now ANPG), and

Angola’s oil and gas laws generally refer to these companies as “associates.”

189

While some

regulations govern the timing and scope of decommissioning planning,

190

historically

decommissioning liability has been primarily assigned through negotiated contracts between the

national concessionaire and its associates.

191

The modern abandonment and decommissioning of both onshore and offshore wells is

governed by a 2018 regulation, Presidential Decree 91/18.

192

However, while this regulation affected

future concessions and new development areas, pre-existing concession agreements remained

governed by their previously negotiated funding arrangements.

7.2 Liability for Decommissioning

7.2.1 Responsibility for Decommissioning

“[U]ntil recently the Angolan Petroleum legal framework was mostly silent on

decommissioning and abandonment, and not 100% clear on other environmental issues.”

193

Article

75 of the Petroleum Activities Law places the responsibility for decommissioning jointly on the

national concessionaire and its associates,

194

but provides little further detail. Under PSAs, rights in

offshore oil infrastructure return to the concessionaire at the termination of the agreement, and

188

Id.

189

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 226–28 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

190

For example, Presidential Decree 1/09 requires SONANGOL to estimate decommissioning costs and create an

“abandonment” plan alongside new development plans. Id. at 231.

191

Id. at 226–28.

192

Claudia Santos Cruz & Bruno Xavier de Pina, Oil and Gas Regulation: Angola 2023, ICLG (Feb. 22, 2023),

https://iclg.com/practice-areas/oil-and-gas-laws-and-regulations/angola.

193

Ricardo Silva, When the Time Comes: Brief Considerations on the New Angolan Abandonment and Decommissioning

Framework, PETROLEUM AFRICA (July/August 2019), https://www.petroleumafrica.com/wp-content/uploads/2019/09/New-

Angola-Abandonment-and-Decommissioning-Framework.pdf.

194

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 228–29 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

model PSAs that were used by Sonangol have incorporated provisions that allow the concessionaire

to either decommission facilities or deliver them, “in good operational condition,” to the

concessionaire.

195

The Petroleum Activities Law requires decommissioning to be conducted in accordance with

a pre-established plan between the concessionaire and the associate, and requires “abandonment

and rehabilitation” to be “undertaken in line with . . . normal practice in the oil industry.”

196

Generally, PSAs or similar contracts place the burden of this procedure on the associate.

197

However,

since the 1980s PSAs have allowed associate operators to recover the value of their planned

contributions to decommission costs (see “Decommissioning Funding Structures” below) as “Cost

Oil.”

198

“Cost Oil” is a term used in PSAs to refer to revenue set aside to defray infrastructure or

operating costs before the remaining revenue, the “Profit Oil,” is split between an operator and a

concessionaire.

199

Designating decommissioning funds as “Cost Oil” means that the burden is

effectively shared between the concessionaire and its associates, assuming that enough revenue is

produced to cover the expenses.

Presidential Decree 91/18 provides that “if contractor group members are replaced by new

members, the new entities shall be responsible for the abandonment and decommissioning of wells

and facilities.”

200

195

Id. at 228–30.

196

OVERVIEW OF INTERNATIONAL OFFSHORE DECOMMISSIONING REGULATIONS 105, INTERNATIONAL ASSOCIATION OF OIL AND

GAS PRODUCERS (July 2017), https://www.iogp.org/bookstore/product/overview-of-international-offshore-

decommissioning-regulations-volume-1-facilities/.

197

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 230 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

198

Id. at 234–35.

199

See Kirsten Bindermann, Production-Sharing Agreements: An Economic Analysis, OXFORD INSTITUTE FOR ENERGY STUDIES

(Oct. 1999), https://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/WPM25-

ProductionSharingAgreementsAnEconomicAnalysis-KBindemann-1999.pdf (defining common terms in PSAs).

200

Ricardo Silva, When the Time Comes: Brief Considerations on the New Angolan Abandonment and Decommissioning

Framework, PETROLEUM AFRICA (July/August 2019), https://www.petroleumafrica.com/wp-content/uploads/2019/09/New-

Angola-Abandonment-and-Decommissioning-Framework.pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

7.2.2 Post-Decommissioning Liability

At the end of decommissioning, associates surrender their facilities to the concessionaire.

Historically, “companies have struggled with” the issue of “how to treat residual liability” following

decommissioning, and with the categorization of their decommissioning liabilities when their

facilities are taken over by the concessionaire.

201

Model PSAs published from September 2015 and onward directly address this situation, and

“clearly state[] that if [the concessionaire] requires the Contractor Group to abandon” an offshore

facility, the associates “shall have no further liability or obligation” in connection with that

infrastructure “save in the event of gross negligence or willful misconduct in the execution of the

abandonment obligations.”

202

Presidential Decree 91/18 provides that once decommissioning is

complete and a satisfactory post-decommissioning inspection has occurred, the concessionaire must

“issue a release of liability and indemnity agreement” for the associates.

203

7.3 Financing Decommissioning

7.3.1 Decommissioning Funding Structures

As a general matter, decommission funding in Angola operates on a “designated fund”

model. Historically, Angola’s laws and regulations did not directly address decommissioning

obligations or funding, and decommission funding was negotiated between Sonangol and its

associates under the terms of their respective PSAs.

204

Starting in the 1990s abandonment cost

provisions were included in some concession decrees, petroleum concessions issued by the

government of Angola to the national concessionaire (then Sonangol) that established the terms,

periods, and phases of specific oil projects.

205

These provisions required the concession’s operator to

201

Id.

202

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 231 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

203

New Rules on Abandonment of Wells and Decommissioning of Petroleum Facilities, CLARENCE ABOGADOS & ASOCIADOS,

(n.d.), https://clarenceabogados.com/client-alert/new-rules-on-abandonment-and-decommissioning/.

204

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 235 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

205

Eduardo Vera-Cruz Advogados, Key Legislation and Regulatory Structure in the Angolan Oil and Gas Sector, H.G. LEGAL

RESOURCES (n.d.), https://www.hg.org/legal-articles/key-legislation-and-regulatory-structure-in-the-angolan-oil-and-gas-

sector-30556.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

create an “abandonment cost” estimate “when production rates started to diminish” and reached a

specified level.

206

The associate would then make quarterly payments into an escrow fund held by

the concessionaire for abandonment and decommissioning expenditures.

207

If these funds were

insufficient, the concessionaire could require its associates to pay the additional expenses “as normal

operating expenditures.”

208

These mechanics were not universally applied, however, and some

concession decrees left decommission funding to be negotiated in the PSAs.

209

Presidential Decree 91/2018 established a new funding structure for decommissioning

obligations in Angola.

210

It requires the concessionaire and its associates to create detailed

decommissioning plans according to specified technical procedures, to update these plans every

three years, and to finalize a decommissioning plan at least 12 months prior to decommissioning.

211

Presidential Decree 91/2018 also requires associates to “constitute abandonment funds” in the

amount of the estimated liability “by depositing the relevant funds in an escrow account” held by

the concessionaire.

212

Funding is due at different times based on the stage of the relevant

concession—for new concessions, the estimated decommissioning costs must be paid “at the

commencement of construction,” while for “new development areas within existing concessions”

funding will be due on negotiated dates that must occur before “50% of reserves have been

recovered.”

213

The framework set out in Presidential Decree 91/2018 “is mandatory for all companies

carrying out petroleum operations in Angola” as of the beginning of 2019, and will be applied to all

206

Rui Mayer, Bruno Neves de Sousa, & João Olivera, Angola, in OIL AND GAS DECOMMISSIONING: LAW, POLICY, AND

COMPARATIVE PRACTICE 225, 235 (Marc Hammerson & Nicholas Antonas eds., 2nd. ed. 2016).

207

Id.

208

Id.

209

Id. at 236.

210

Claudia Santos Cruz & Bruno Xavier de Pina, Oil and Gas Regulation: Angola 2023, ICLG (Feb. 22, 2023),

https://iclg.com/practice-areas/oil-and-gas-laws-and-regulations/angola.

211

Id.

212

Ricardo Silva, When the Time Comes: Brief Considerations on the New Angolan Abandonment and Decommissioning

Framework, PETROLEUM AFRICA (July/August 2019), https://www.petroleumafrica.com/wp-content/uploads/2019/09/New-

Angola-Abandonment-and-Decommissioning-Framework.pdf.

213

New Rules on Abandonment of Wells and Decommissioning of Petroleum Facilities, CLARENCE ABOGADOS & ASOCIADOS,

(n.d.), https://clarenceabogados.com/client-alert/new-rules-on-abandonment-and-decommissioning/.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

existing contracts.

214

However, while the funding structure affects future concessions and new

development areas, the decree did not reopen the decommission finance structures in existing

contracts. Under the decree pre-existing concessions with existing decommissioning funding

structures are unchanged, and the existing contract provisions apply.

215

7.3.2 Guarantee, Bonding, and Security Arrangements

Angola’s decommissioning escrow accounts are the primary security arrangement for

decommissioning obligations (see Section 7.3.1: “Decommissioning Funding Structures” above).

7.3.3 Tax Treatment of Decommissioning

Under the Law on Taxation of Oil Activities, contributions to decommissioning escrow

accounts are treated as production expenses “for the purposes of assessing taxable income.”

216

7.4 Decommissioning Provisions in Angolan Contracts

217

7.4.1 Existence and Scope of Decommissioning Provisions

Although several analyzed Angolan contracts contain dedicated decommissioning clauses,

these clauses define decommissioning and abandonment obligations by reference to abandonment

requirements set out in national legislation.

218

214

Ricardo Silva, When the Time Comes: Brief Considerations on the New Angolan Abandonment and Decommissioning

Framework, PETROLEUM AFRICA (July/August 2019), https://www.petroleumafrica.com/wp-content/uploads/2019/09/New-

Angola-Abandonment-and-Decommissioning-Framework.pdf.

215

New Rules on Abandonment of Wells and Decommissioning of Petroleum Facilities, CLARENCE ABOGADOS & ASOCIADOS,

(n.d.), https://clarenceabogados.com/client-alert/new-rules-on-abandonment-and-decommissioning/.

216

OVERVIEW OF INTERNATIONAL OFFSHORE DECOMMISSIONING REGULATIONS 104, INTERNATIONAL ASSOCIATION OF OIL AND

GAS PRODUCERS (July 2017), https://www.iogp.org/bookstore/product/overview-of-international-offshore-

decommissioning-regulations-volume-1-facilities/.

217

As previously noted in the introduction to this paper, the contracts analyzed in this section may have been concluded

before the enactment of the latest regulations analyzed in this paper. These contracts may also be subject to stabilization

clauses, legislative “grandfathering” provisions, or other jurisdiction-specific legal principles that limit the relevance of

generally applicable laws and regulations. Finally, contracts are taken at face value, and we make no assessments as to

whether any particular contractual clause is legal or enforceable in any relevant jurisdiction.

218

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), Vaalco Angola (Kwanza) Inc.,

Sonangol Pesquisa e Produção S.A., InterOil Exploration and Production ASA, Production Sharing Agreement, 2006,

Article 28, https://resourcecontracts.org/contract/ocds-591adf-3664745125/view#/pdf;

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 21 Ltd., Sonangol

Pesquisa e Produção S.A., Nazaki Oil and Gáz S.A., Alper Oil Lda, Service Contract, 2010, Article 27,

https://resourcecontracts.org/contract/ocds-591adf-0839745741/view#/pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

7.4.2 Triggers of Decommissioning Liability

Under analyzed Angolan contracts, the decision to proceed with decommissioning is in the

hands of Angola’s state-owned concessionaire, even though Angola’s contracts assign liability for

the work of decommissioning to the private oil company. As a general principle, contracts executed

by Angola’s concessionaire require the private oil company to return fields and facilities to the

concessionaire when the production phase is completed.

219

However, Angolan contracts contain an

elective trigger, that obliges the private oil company to abandon wells and decommission facilities

proceeding upon requirement, instruction, or authorization of the concessionaire.

220

7.4.3 Development and Scope of Decommissioning Plan

Analyzed contracts from Angola require oil companies to develop and submit a detailed

decommissioning plan at least 180 days before the termination of the contract or the date of

abandonment and decommissioning in any part of the contract area, without specifically outlining

minimum requirements for such a plan.

221

7.4.4 Government Approval and Oversight

Angolan contracts may explicitly require government approval for decommissioning,

abandonment, or transfers. For example, a 2010 Angolan contract analyzed for this report requires

219

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 20 Ltd.,

Sonangol Pesquisa E Produção S.A., BP Exploration Angola (Kwanza Benguela) Limited, China Sonangol International

Holding Limited, Production Sharing Agreement, 2012, Article 28.1, https://resourcecontracts.org/contract/ocds-591adf-

0014595575/view#/pdf.

220

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 20 Ltd.,

Sonangol Pesquisa E Produção S.A., BP Exploration Angola (Kwanza Benguela) Limited, China Sonangol International

Holding Limited, Production Sharing Agreement, 2012, Article 28.2, , https://resourcecontracts.org/contract/ocds-591adf-

0014595575/view#/pdf.

221

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), Vaalco Angola (Kwanza) Inc.,

Sonangol Pesquisa e Produção S.A., InterOil Exploration and Production ASA, Production Sharing Agreement, 2006,

Article 28, https://resourcecontracts.org/contract/ocds-591adf-3664745125/view#/pdf;

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 20 Ltd., Sonangol

Pesquisa E Produção S.A., BP Exploration Angola (Kwanza Benguela) Limited, China Sonangol International Holding

Limited, Production Sharing Agreement, 2012, Article 28, https://resourcecontracts.org/contract/ocds-591adf-

0014595575/view#/pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

the private oil company to hand over all of the infrastructure, equipment and all wells within the

relevant area “in accordance with a plan approved by [the state-owned oil company].”

222

7.4.5 Funding and Liability

A 2012 Angolan contract analyzed for this review provides that decommissioning costs are

borne by the contracting private oil company, rather than by the concessionaire or the government.

223

The 2012 contract further requires the private company to establish a decommissioning or

abandonment fund, and sets out rules governing contributions to that fund.

224

If decommissioning

funds are insufficient, Angolan contracts require the private company and the concessionaire to

“agree on the method of covering the additional costs,” without excusing the private company from

its obligation to perform the work of decommissioning.

225

Contracts signed by Angola in 2006 and 2012 provide that “[a]fter having carried out the

abandonment of the Wells and related assets … or after the [oil company] carries out the handing

over of the equipment and Wells to [the state-owned concessionaire] …, the [oil company] will have

no further liability in relation to the same,” but provide for exceptions (subsisting obligations) “in

cases of gross negligence, willful misconduct or Serious Fault.” In addition, the state-owned

concessionaire also assumes an obligation to “indemnify and defend the [oil company] in case of

any claims related to such Wells and assets.”

226

222

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 21 Ltd.,

Sonangol Pesquisa e Produção S.A., Nazaki Oil and Gáz S.A., Alper Oil Lda, Service Contract, 2010, Article 27.1,

https://resourcecontracts.org/contract/ocds-591adf-0839745741/view#/pdf.

223

See Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 20 Ltd.,

Sonangol Pesquisa E Produção S.A., BP Exploration Angola (Kwanza Benguela) Limited, China Sonangol International

Holding Limited, Production Sharing Agreement, 2012, Article 28, https://resourcecontracts.org/contract/ocds-591adf-

0014595575/view#/pdf.

224

See id. at Annex 3(e).

225

Id. at Article 28.4; see also Sociedade Nacional de Combustíveis de Angola – Empresa Pública (Sonangol, E.P.), Vaalco

Angola (Kwanza) Inc., Sonangol Pesquisa e Produção S.A., InterOil Exploration and Production ASA, Production

Sharing Agreement, 2006, Article 28.4, https://resourcecontracts.org/contract/ocds-591adf-3664745125/view#/pdf (same).

226

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), Vaalco Angola (Kwanza) Inc.,

Sonangol Pesquisa e Produção S.A., InterOil Exploration and Production ASA, Production Sharing Agreement, 2006,

Article 28, https://resourcecontracts.org/contract/ocds-591adf-3664745125/view#/pdf;

Sociedade Nacional de Combustíveis de Angola - Empresa Pública (Sonangol, E.P.), CIE Angola Block 20 Ltd., Sonangol

Pesquisa E Produção S.A., BP Exploration Angola (Kwanza Benguela) Limited, China Sonangol International Holding

Limited, Production Sharing Agreement, 2012, Article 28, https://resourcecontracts.org/contract/ocds-591adf-

0014595575/view#/pdf.

Prepublication Draft: Decommissioning Liability at the End of Offshore Oil and Gas

Sabin Center for Climate Change Law | Columbia Law School

7.4.6 Stabilization Clauses

Angolan contracts from 2006, 2010, and 2012 contain stabilization clauses. These contracts

each provide that, if “any change in the provisions of any law, decree, or regulation in force in

[Angola]” occurs after the relevant contract was signed “which adversely affects the obligations,

rights, and benefits” of the parties, the parties must agree to contractual amendments that “restore

such rights, obligations, and forecasted benefits.”

227