Whose liability is it anyway? Apache UK Investment Limited v Esso Exploration and Production UK Limited (2021) EWHC 128

On the 17 May 2021, the Commercial Court clarified the proper interpretation of the Petroleum Act 1998, dealing specifically with the extent of previous licensees’ liability in decommissioning programmes.

In 2011, Apache UK Investment Limited (“Apache”) entered into a sale and purchase agreement with Esso Exploration and Production UK Limited (“Esso”), by which Apache acquired several oil and gas assets in the North Sea.

Before this, the newly acquired licensee company had been served several section 29 notices under the Petroleum Act, requiring submission to decommissioning programmes.

The parties entered into a series of Bilateral Decommissioning Security Agreements (“BDSAs”), under which Apache agreed to indemnify Esso for any decommissioning obligations arising out of the transferred assets. A dispute arose over four subsea wells which were drilled after the sale to Apache.

Issues

Two key issues arose under the BDSA regarding proposed decommissioning plans for 2021.

The first issue, which this article does not discuss, was the choice of which proposed decommissioning plan was to apply, which required contractual interpretation of the BDSA’s specific terms.

The second issue was contingent upon key analysis of the Petroleum Act’s decommissioning regime, requiring judicial interpretation of the statutory scheme.

The arguments

Esso objected to Apache’s proposed plan for 2021, arguing that the cost estimate should have included the four additional wells that were drilled after they sold the assets to Apache, on the basis that they could become liable for the decommissioning costs (if the section 29 notices originally served on Esso were wide enough to extend to these additional wells).

Apache contended that for the additional wells neither Esso nor their predecessors fell within section 30(1) of the Petroleum Act, as the additional wells were drilled after Esso divested itself of the relevant licences on the sale to Apache and so section 34 of the Petroleum Act, which concerns revision of programs, was not engaged.

In turn, Esso (that had discussed their concerns with the Offshore Petroleum Regulator for Environment and Decommissioning), contended that they could be liable for the decommissioning costs of the additional wells under section 34 of the Petroleum Act, and, therefore, Esso were entitled to additional security from Apache in respect of the potential costs of decommissioning the additional wells.

Decision

The judge held that Esso could not be liable for the decommissioning costs of the additional wells under the section 29 notices, because the wells did not exist, nor were they “intended to be established”, when Esso owned the assets and carried out exploration and production activities, or when the original section 29 notices were served.

Referring to the objectives of the Petroleum Act’s regime, the court noted that such an interpretation aligns with the objective of ensuring that those who have “derived a financial benefit from an offshore installation should also be responsible for its decommissioning”.

When interpreting the definition of “offshore installation” under sections 44(1) and 44(5) of the Petroleum Act, the court suggested a narrower approach, dismissing the argument that the phrase could refer to whole fields or sub-fields as opposed to equipment or structures within a field. The court highlighted the Act’s reference to “any floating structure or device”, holding that this could not be interpreted as describing an entire field. This is important guidance for future decommissioning projects.

However, Esso could still be liable for decommissioning costs under section 34 of the Act in due course.

Comment

Now that decommissioning programmes are being put into practice, the court’s interpretation of the Petroleum Act’s statutory regime is a valuable insight into what to expect. The broad terms of section 29 notices are now more refined in practice, limiting the liability of former licensees in respect of new asset installations that they did not intend during their ownership.

Wells drilled by new owners will not lead to liability for previous owners in respect of decommissioning costs. This clarification will assist those involved in decommissioning security agreements when drafting proposed plans, as new wells will not need to be included, nor will security be required in relation to such wells. Additionally, former licensees can take solace in the court’s interpretation, as they will not be liable for decommissioning costs for wells that they did not drill or intend to drill.

However, sellers should still be cautious, as they may still be liable for any installations that they intended to establish at the time when section 29 notices were served. The OPRED guidance suggests that a former licensee could be liable for the decommissioning of new equipment added to platforms that existed during their ownership, but the court has not yet clarified this point. Until the English courts take a view on this, companies involved in decommissioning security agreements should be mindful of the possibility of being liable for equipment that they did not install.

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