In the recent case of Apache UK Investments Limited v Esso Exploration and Production UK Limited  EWHC 1283 (Comm), the English High Court has rendered an important decision which deals with the extent to which a former owner of an oil and gas field on the British Continental Shelf could be held responsible by the British government for downgrading of wells that were drilled after the land was sold.
In this short article, we summarize the court ruling and the legal basis on which upstream oil and gas licensees and their affiliates may be required to finance and perform the decommissioning of oil and gas facilities and pipelines. offshore in the UK. We also briefly outlined the potential consequences of the Court’s decision for industry participants.
Brief summary of the legal responsibility for decommissioning
Part IV (Abandonment of Offshore Installations) of the Petroleum Act 1998 (the “Act“) establishes the legal basis on which participants in the upstream oil and gas exploration and production industry may be required to finance and carry out the technically difficult exercise of decommissioning petroleum facilities and pipelines and offshore gas at the end of their productive life.
Section 44 of the Act defines âoffshore installationsâ as any installation which is or has been maintained, or intends to be established, for the exploration and production of oil and gas.
The UK government has the power to issue an opinion on certain persons under section 29 of the Act (a “Section 29 Noticeâ) Requiring them to submit a decommissioning program to the UK government for approval, and if they fail to do so, the UK government can prepare its own program under Section 33 of the Act. Once the program is approved by the government, these persons may be required to carry out the decommissioning program under section 36 of the Act.
Persons who may receive a section 29 notice include current licensees, current managers (or operators) or owners of facilities or pipelines, and their associated persons (such as affiliates and operators). entities in which 50% or more of the shares are held).
Former owners (and their associates) may be required to implement decommissioning programs, including within the limits of Article 34 of the law. They can only be held responsible for the decommissioning of installations or pipelines at sea under section 34 if they belong to the category of persons to whom a notice under section 29 concerning the installations or pipelines concerned. could have been given at some point since the first Article 29 Notice regarding this facility or pipeline.
The basic rationale for public policy appears to be that former owners can be held responsible for dismantling offshore facilities or pipelines in which they had an economic interest at the time they sold their interest in the field, but they do not. should not be held responsible for facilities and pipelines put in place after they leave the field and for which they did not derive any economic benefit.
Apache vs. Esso Case summary
ExxonMobil (through its subsidiary Esso Exploration and Production UK Limited) sold a set of high value UK oil and gas assets in the North Sea to Apache in 2011. As part of this transaction, Apache agreed (as it was to custom at the time) to provide security in the form of guarantees and bank letters of credit to ExxonMobil for the responsibility for dismantling existing facilities and pipelines at the time of sale.
Importantly, Apache’s obligation to provide guarantees and letters of credit did not extend to “new field installations” for which ExxonMobil “is not obligated to submit or perform a [decommissioning] program … under the [Act]â.
A dispute arose between the parties as to whether the relevant Section 29 notices (which generally referred to “wells”) covered four new wells drilled after the sale of the assets to Apache and many years after the issuance of notices under section 29.
ExxonMobil argued that they did so and therefore could be liable for the corresponding decommissioning costs under section 34 of the Act and that Apache would therefore be required to provide security to ExxonMobil for these costs. . Had ExxonMobil been successful in this argument, it likely could have had much wider consequences for ExxonMobil’s residual liabilities in the UK.
Apache argued that such a guarantee was not required because ExxonMobil did not have the potential liability under section 34 of the Act to decommission these new wells, and these wells were not âOffshore facilitiesâ at the time the advisories were issued because they had not been maintained or intended to be established at the time the advisories were issued.
The court’s decision
The High Court ruled in favor of Apache, finding that the four additional wells did not fall within the scope of the existing section 29 notices and that Apache was not required to provide security to ExxonMobil with respect to these wells.
In rendering its judgment, the Court determined that:
- Whether the existing section 29 notices could be interpreted as applicable to additional wells depended on what was meant by the phrase “offshore installationâ.
- “Ooffshore installationâReferred to the equipment or structures within the field or subfield, such as a platform, rather than the entire field itself (especially given that under the section 44 of the Act, the expression is indicated to include structures or floating devices maintained on a station).
- Additional wells, constructed many years after the publication of the section 29 notices, were not included in the section 29 notices because at the time those notices were published, they were not included in the section 29 notices. were not “being kept” or “intended to be established“And were therefore not”offshore installationsAt the time the notices were issued.
Comments and consequences of this decision
The court ruling will be welcomed by sellers (such as ExxonMobil) as it clarifies that wells that had not been drilled, or were not intended to be drilled, at the time of sale are not facilities for which they can be made responsible under the law.
Likewise, for those (like Apache) who have agreed, or may agree in the future, to guarantee the dismantling costs, this decision tightens the limits on the necessary security amounts.