Australian government steps in for liquidated operator

Out-Law News | 21 Feb 2020 | 10:34 am | 2 min. read

The Australian government has appointed Upstream Production Solutions (UPS) to operate and maintain the Northern Endeavour floating oil and gas facility following a public tender process.

The government stepped in after the collapse of the Northern Oil and Gas Australia (NOGA) group of companies earlier this month. NOGA has been the owner of the Northern Endeavour FPSO as part of the Laminaria-Corallina project in the Timor Sea since 2016. UPS operated the facility on behalf of NOGA until NOGA's liquidation earlier this month led to the vessel being de-manned.

UPS will operate Northern Endeavour in what is known as 'lighthouse' mode, the minimum required for safe operations, as the Australian government consults further with the industry on the long-term future of the facility. Lighthouse mode involves minimal staffing required to provide safety critical services, but no petroleum production will take place.

Scott Brian

Brian Scott

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An ugly outcome to the NOGA situation with the taxpayer on the hook would be bad for these deals and for the industry, which is already in the public opinion cross-hairs.

Keith Pitt, Australia's resources minister, said: "It was essential that we re-crewed the Northern Endeavour quickly, to maintain the safety of the vessel and the surrounding Timor Sea environment, and that has been done … The Australian government will now start consultations with industry experts to consider a longer-term resolution to the situation".

The Laminaria-Corallina project was a late-life asset sold by previous owners Woodside and Talisman in 2016 after more than 15 years of production. The little-known NOGA took over, anticipating that revenue from production would enable it to operate the field through to closure and remediation. However, problems identified by the safety and environment regulator, NOPSEMA, in July 2019 led to the facility being shut in. With cash-flow from production turned off and no balance sheet to draw on, administration and then liquidation of NOGA followed.  Among the associated liabilities is the cost of decommissioning and remediation, estimated at A$200 million (US$132m).

Perth-based oil and gas expert Brian Scott of Pinsent Masons, the law firm behind Out-Law, said: "Insolvency of an offshore operator is an exceptional circumstance for the Australian oil and gas industry".

"The action of the government to appoint a contractor to run the facility after liquidation of the owner is unprecedented," he said. "It is the first formal step by which the Government has taken on obligations associated with the licences which were held by the company. The treatment of the larger decommissioning and remediation obligations remains to be resolved. Insolvent entities in the resources industry raise particular challenges given the extent of tail-end liabilities which may be unfunded notwithstanding the revenues over the asset life."

Scott added that the collapse of NOGA raised important questions for the industry and the regulators in Australia.

"Successful deals for late life assets are an important to part of the next phase of the industry in Australia and the region," he said. "Pinsent Masons teams in the UK North Sea have in recent years worked on numerous deals to find new owners for assets in that environment. The regulatory and tax regime and approach of regulators is key, as is effective deal structuring."

"An ugly outcome to the NOGA situation with the taxpayer on the hook would be bad for these deals and for the industry, which is already in the public opinion cross-hairs. Hopefully the right combination of industry response by key players and APPEA, with regulatory review and update, can provide the assurance needed," he said.