ICC Commission Report Construction Industry Arbitrations Part 2
Out-Law Analysis | 01 Oct 2019 | 1:54 pm | 4 min. read
Western Australia's value as a hub for decommissioning, helping drive best practice in the Asia Pacific region is well known. In addition, the value of sharing expertise between Scotland and Western Australia is recognised, not least by respective government agencies. With UK Continental Shelf (UKCS) execution in these areas relatively more advanced, there is valuable experience to draw on.
Drawing on themes observed recently in the UKCS context, we highlight here some approaches to contractual risk sharing and collaboration that can be a feature of Western Australia's role in developing and delivering increased efficiency and excellence in decommissioning projects for the region.
The regulatory backdrop for decommissioning across Asia Pacific is part of the challenge. A detailed discussion is beyond our scope, but attributes of various systems serve to illustrate. In Indonesia, there are different rules for different generations of production sharing contracts (PSCs) which are confusing and uncertain, together with debate on interaction between terms of the PSC and general law. In Malaysia, the 'cess fund' system is perhaps more common but Petronas, the government-owned oil and gas company, bears the risks of cost estimates and currency exposure. In Thailand, a flurry of rules and regulations over the last few years has sought to advance the regulatory system yet has led to much detail and areas of uncertainty that eclipse the main objective.
A positive and collaborative interaction between regulators, operators and contractors has the potential to transform the current picture.
At the risk of stating the obvious, and with a dose wishful thinking, a positive and collaborative interaction between regulators, operators and contractors has the potential to transform the current picture. Arguably, only regulators have the full picture of what needs to be done on an aggregate basis and how it can fit with other priorities for the oil and gas industry. Access to fiscal and other levers is also key to aligning incentives with objectives.
A sign of a possible direction of travel is the Southern North Sea joint working group on multiple-asset decommissioning projects, convened and facilitated recently by the UK Oil and Gas Authority. Here, the government regulator takes a central stewardship role, encouraging asset holders to collaborate in sharing data and resources in a bid to drive forward projects and reduce costs as far as possible. 'Stop-start' decommissioning activity clearly impedes capacity building, with one of the biggest challenges faced by the service sector being the inability to plan properly for a pipeline of work and investment at client level. By comparison, a model in which, for example, Petronas is able to shape and manage a programme of decommissioning work across the whole of the Malaysian sector would offer significant advantages.
Another issue encountered in the UKCS when tendering decommissioning work has been that single contractors are reluctant to take on a full programme of work and wish to tender only for precise areas of expertise: for example, well plug and abandonment (P&A) as distinct from facilities removal.
Discussion in the industry around planning for decommissioning has led to some proposals for contractors to take on contracts firstly to run oil and gas assets which are at a late-life stage through to project completion; and then carry out the decommissioning work.
Another development has been joint ventures being assembled involving contractors with complementary capabilities. This has led to instances where joint venture partners are jointly named on the operator/contractor arrangements and are jointly and severally liable under that contract. A similar concept to this unincorporated joint venture model, with joint and several liability, is currently seen in Australian government-led infrastructure projects.
A contractor could perhaps explore ways to provide vendor finance and ultimately some form of adaptation of a project finance style model involving third party finance could emerge.
In the UKCS context, contract structures are being adopted where the contractor takes title to redundant decommissioned materials as part of its remuneration – so, non-financial remuneration sitting alongside traditional monetary sums for the provision of services. This is an undefined benefit given that the price of steel is subject to fluctuation yet, as alluded to below, this may be tied to the question of an end-to-end solution.
The extent of removal of facilities and structures from the field has been a significant part of the public debate on decommissioning. Recently, we have encountered increasing recognition that the manner of ultimate disposal of facilities is a significant area of concern. Working conditions, health and safety practices and the impact on the local environment of operations to cut up and dispose of disused facilities demands an increased focus and a concerted approach to best practice. The Modern Slavery Act also presents a legal edge to the issue. From this, the need to ensure a solution that is conceptually and physically 'end-to-end' emerges.
Drawing the various threads together and excusing the lack of a chronologically accurate label, there is potential value in a 'turn-key' style solution to decommissioning. The UKCS has seen offerings from a variety of oilfield services companies of an integrated decommissioning solution. Appropriate risk allocation is a key negotiating point in such arrangements, with the integrated provider often reluctant to be more than simply a 'pass-through' in the chain of liabilities.
Nevertheless, an interesting question is whether the contractor's solution could form part of a broader package. The insurance industry has developed Decommissioning All Risks (DAR) policies for use in connection with decommissioning projects, the decommissioning equivalent of more established Construction All Risks (CAR) policies. As a next step, a contractor could perhaps explore ways to provide vendor finance and ultimately some form of adaptation of a project finance style model involving third party finance could emerge – a structure under which a single contract at the centre enables provision of an integrated solution with carefully designed risk allocation.
There is work to be done to fit these various parts together. As the volume of work builds, over time there will be a chance to help shape new solutions drawing together the expertise of the service provider community. This can surely enhance efficiency in a number of ways and working with regulators help drive and deliver best practice in this vitally important next phase for the oil and gas industry.
ICC Commission Report Construction Industry Arbitrations Part 2