Are you on the hook for offshore oil and gas decommissioning costs? New guidelines on the "trailing liability" regime

By Tim Donisi, Karina Hanrahan
17 Mar 2022
If you're in the offshore oil and gas sector, you should familiarise yourself with the amended legislation and the new Guidelines, and consider whether you could potentially be subject to a trailing liability.

Amendments to the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGS Act) to introduce broad trailing liability for decommissioning of offshore oil and gas infrastructure came into effect on 2 March 2022. As a result, a wide range of entities (beyond the current titleholder) are now potentially liable for decommissioning works.

New guidelines published by the Commonwealth Department of Industry, Science, Energy and Resources (DISER), Trailing liability for decommissioning of offshore petroleum property, (Guidelines) answer some of the key questions in respect of how the Government envisages the trailing liability regime will operate.

Who can/will be issued a remedial direction?

The regime is deliberately broad with the stated aim of ensuring the Australian Government and taxpayers do not need to foot the bill for any future decommissioning work.

Under the amended Act a "remedial direction" can be issued by NOPSEMA or the Minister requiring one or more of the following persons to do decommissioning works:

  • a current or former titleholder;
  • a related body corporate of a current or former titleholder; or
  • a "related person", being someone who the Minister determines it is appropriate to issue with a remedial direction, having regard to whether the person:
    • acts or acted jointly with the current or former titleholder in respect of operations authorised by the title;
    • derived or is capable of deriving a significant financial benefit from the title; or
    • has or had the ability to influence activities under the title and compliance with obligations under the OPGGS Act.

These categories can capture companies, joint ventures and individuals.

The new regime is effectively retrospective back to 1 January 2021. Current titleholders and former titleholders (that ceased to hold the permit on or after 1 January 2021), as well as their related bodies corporate are covered by the new regime. Further, in determining who is a "related person" only circumstances and events that occurred after 1 January 2021 are relevant.

Where a title (or block) ceased to be in force before 1 January 2021 the previous (far more limited) trailing liability regime applies.

The Guidelines state that any decision as to who receives a remedial direction is made on a case by case basis, however the following factors may be taken into account:

  • Experience with the property: For example, did the party drill or install the property, or was it someone else? Do they have the relevant expertise to decommission that property?
  • Timing: A person who was more recently involved in the title is more likely to have relevant knowledge of the condition of the property.
  • Capacity to undertake remedial actions: This includes financial capacity as well as ability to respond to a time-sensitive issue, and technical capacity to comply with the direction.

The Guidelines note that it is not automatically assumed that a larger company will be more capable to perform the works than another person or entity. However, it remains to be seen how this will play out in practice.

The Guidelines also provide some specific guidance on the following groups:

  • Major shareholders: People (including directors) who have received a significant financial benefit from their shareholding do fall within the scope of a "related person", and therefore can be issued with a remedial direction.
  • Joint ventures: An obligation under the Act will be imposed on each of the joint venture parties, and if any joint venture party ceases to exist at the time a remedial direction is issued, the remaining parties will need to pick up the whole bill.
  • Companies within a corporate group: Even if a group company does not fall under the definition of a "related body corporate" within section 50 of the Corporations Act, it may still be deemed to be a "Related Person", and be issued with a remedial direction.
  • Individuals: The Guidelines indicate individuals will generally only be issued remedial directions where there is no former titleholder or a related body corporate who is available to undertake the works.
  • Contractors / Suppliers / Financiers: The Guidelines provide that "persons who are paid market value for work undertaken or goods or services provided are not within the scope of the trailing liability provisions." The Guidelines state that this may include employees, contractors, customers, advisers, suppliers, banks and financial institutions.

It is important to note that no such "market value" limitation is included in the Act or the Regulations. Further, the Guidelines are just that - a guide - and do not replace, amend or restrict the legislation. Accordingly, despite the Guidelines indicating "contractors" are not within the scope of the trailing liability provisions, contractors who have derived a significant financial benefit, have experience with the property and capacity to undertake remedial actions (such as drilling companies and companies contracted to operate offshore facilities), should not discount the risk of receiving a remedial direction.

How long am I on the hook for?

A person can be issued with a remedial direction at any point after their involvement in the title has ceased, even if the title has been revoked, cancelled, surrendered, terminated or expired (provided they held the title, were a related body corporate or a "related person" on or after 1 January 2021).

What happens if I receive a remedial direction?

If NOPSEMA or the responsible Commonwealth Minister propose to issue a remedial direction, principles of procedural fairness will apply, including that the relevant person or persons will be notified of a proposed direction and given a reasonable opportunity to respond. It is unclear how long this "reasonable opportunity" will be in practice.

A decision to issue a remedial direction can be appealed to the Federal Court via the Administrative Decisions (Judicial Review) Act 1977 (Cth), but the grounds to appeal will be narrow (such as a breach of natural justice or an improper exercise of power).

If you receive a remedial direction, you will be required to prepare and have accepted by NOPSEMA all of the relevant documentation for any activities required to comply with the remedial direction, which may include environment plans, safety cases or well operation management plans. You will also need to comply with all of the relevant provisions of the OPGGS Act, and pay regulatory levies.

NOPSEMA and / or the responsible Commonwealth Minister will monitor compliance to ensure you meet the direction. If you breach a direction, there are significant penalties (including the possibility of imprisonment), as set out in the OPGGS Act.

A last resort

The Guidelines emphasise that the trailing liability regime is intended to be an option of last resort and is expected to be used rarely. It is stated to be intended to be used only when there are no effective avenues for remediation by the current titleholder available, or where there is no current titleholder.

Nevertheless, given the amount of money and resources involved in decommissioning offshore assets, entities need to be alive to this potential liability, and take steps to mitigate it where possible.

What you should do

  • Familiarise yourself with the amended legislation and the Guidelines, and consider whether you could potentially be subject to a trailing liability.
  • Proactively plan for decommissioning activities throughout the whole lifecycle of a petroleum project.
  • Looking to sell an offshore asset? Conduct thorough due diligence of any prospective buyer and closely consider appropriate terms to include in any sale agreement (such as indemnities).
  • If you are notified of a proposed remedial direction, seek advice.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.