Clause 67

Energy Bill – in a Public Bill Committee at 9:45 am on 6 March 2008.

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Persons who may be required to submit abandonment programmes

Question proposed, That the clause stand part of the Bill.

Photo of Joan Humble Joan Humble Labour, Blackpool North and Fleetwood

With this it will be convenient to discuss new clause 19—Notices—

‘(1) Section 31 of the Petroleum Act 1998 (c. 17) (section 29 notices: supplementary provisions) is amended as follows.

(2) After subsection (2) insert—

“(2A) Subject to subsection (3), the Secretary of State shall not give a notice under section 29(1) in relation to an offshore installation to a person within paragraph (b) or (c) of section 30(1) unless the person owns or has owned any interest in the offshore installation.”’.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

Part IV of the Petroleum Act 1998, which consolidates provisions from the Petroleum Act 1987, sets up the statutory scheme for the abandonment of oil and gas facilities. We are now moving on from renewables. Since the regime was established in 1987, there have been changes in business practices in the oil and gas industry. For example, there has been increasing participation by smaller players with fewer assets, who, as such, bring increased risks that they might not be able to meet their decommissioning liabilities. This issue is to do with the maturity of the fields on the UK continental shelf in the North sea. Experience has shown that it has not always been possible to share liabilities equitably between the parties responsible for installations or pipelines. This provision will strengthen the existing abandonment regime by amending part IV of the 1998 Act.

The clause will strengthen the provisions in three ways in response to the above challenges. First, it will extend the list of persons who may be required to provide a decommissioning programme upon receipt of a section 29 notice under the 1998 Act. That will include licensees who have transferred their rights to another company without the consent of the Secretary of State. Companies should not be able to avoid their decommissioning liabilities by such unconsented action.

Secondly, it clarifies the existing Petroleum Act provisions so that it is clear that they apply to limited liability partnerships in the same way as they apply to limited companies. That includes the existing provisions for making associates, such as parent companies, responsible for decommissioning when there are, for example, concerns about the financial strength of their subsidiary.

Finally, it will ensure that all those involved in a development share the decommissioning obligation from the same point in time. The wording of the current legislation means that the operator can be made responsible for decommissioning when construction of the platform starts, but his fellow licensees cannot be made responsible until one of the specified activities, such as production, has commenced. That may leave a significant period when the liability rests on a single company, which I do not believe is equitable.

By amending the 1998 Act, the clause will help to ensure a clearer legal framework of rights and duties for all concerned, which will provide greater clarity and certainty for developers and investors.

Photo of John Robertson John Robertson PPS (Dr Kim Howells, Minister of State), Foreign & Commonwealth Office

To help the hon. Member for St. Albans, the Scottish Presbyterian upbringing makes us a lot harder and much more unforgiving than most people. That is linked to why I rise to speak to new clause 19, which is tabled in my name, and is a technical proposal designed to probe the Minister for information. I hope that colleagues will not find it too boring, as I am afraid that that is the end of the light-hearted bit.

The Minister will be aware that now that oil and gas exploration and production on the UK continental shelf is at a more mature phase of development, it is often the case that a single licence governs the development activities of various groups of licensees, all with interests in separate blocks and unrelated infrastructure. Industry representatives have told me that the subdivision of licence interests has increased in recent years, particularly  with the introduction of the fallow block initiative. It has been further complicated in instances where blocks have been re-licensed following decommissioning or partial decommissioning of existing infrastructure.

In discussions with the industry, officials from the Department for Business, Enterprise and Regulatory Reform have stated that their policy is to ensure that a party to a licence will incur a liability with regard to the decommissioning of an offshore installation only where such a party owns, or has previously owned, a beneficial interest in a specific offshore installation that requires decommissioning, or is a related person in accordance with section 30(1)(d) and (e) of the 1998 Act. That liability is not intended to extend either to parties who are licensees but have no ownership interests in the particular infrastructure, or to parties who have re-licensed in a particular block where an offshore installation has been constructed subsequent to the transfer. I hope that everyone is following this. The existing legislation is drafted so as to impose an obligation on the licensee or a previous licensee and does not expressly refer to the ownership interest in the offshore installation. Oil & Gas UK and some of its members are concerned that such liabilities might be attributed to parties who have never been involved with the ownership of such an installation. New clause 19 would clarify the current situation.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I am very interested in the hon. Gentleman’s new clause, but I would be grateful if he would clarify what the problem is. Are people who do not own offshore facilities going round applying for permission to decommission someone else’s facility? I am not sure why they would do that, although perhaps Shell would find it helpful to decommission all BP’s facilities.

Photo of John Robertson John Robertson PPS (Dr Kim Howells, Minister of State), Foreign & Commonwealth Office

The hon. Gentleman asks a very good question, but unfortunately I do not have a very good answer; I only have what I have been told. I will direct his question through to the Minister, who may find a way of giving a nice answer that he will be happy with.

As I said, the new clause seeks to clarify the situation, and perhaps some my remarks will help in that respect. Since the Secretary of State is using the opportunity represented by the Bill to further define, as part of the process that notifies companies that they have become a decommissioning liability, which persons may be served with a section 29 notice, this seems to be an ideal moment to gain clarification on that point. I suggest to the Minister that without the new clause it is likely that companies engaged in the transfer of existing licence interests to companies seeking innovative ways to extend the production life of fields where existing infrastructure has been decommissioned or partially decommissioned will request additional security to ensure that no liability for decommissioning new infrastructure can be attributed to them. Equally, co-licensees with an interest in separate licence areas may seek security to back the indemnities provided under the trust deed to ensure that they face no further unintended liabilities.

This clarification should assist with active training in the asset market and encourage new investors by removing the potential for increased licence entry costs. I look forward to the Minister’s response.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

With your permission, Mrs. Humble, I will clarify an earlier point which is, in a way, related. The hon. Member for Wealden asked whether a combined hybrid project—for example, an offshore wind turbine on an oil and gas platform, a development that is beginning to happen—will be covered by two decommissioning regimes. The answer is yes. I can envisage someone making the debating point that that seems onerous, but it is unreasonable to propose a new clause to deal with a variety of hybrid types that might occur in future. The hon. Gentleman also asked whether there are parties looking to decommission oil and gas installations for which they have no interest. The answer is no.

The new clause is interesting. It relates to the maturity of the UKCS, where a number of players are now involved, including some relatively new and small enterprising companies. Our initial assessment is that the new clause could apply to well over 100 licences. We are aware of the issue, have considered it carefully, and will continue to do so. The new clause is a significant proposal, but we feel that there are complexities that need to be fully identified and discussed with the industry before deciding on the right way to treat the different parties that might be covered by it. One issue is that over the years companies have created a patchwork of commercial arrangements within many of the licences by splitting them into sub-areas. Some licensees have no interest in a particular commercial sub-area but are still a party to the licence that covers it. The wording of section 30 of the 1998 Act brings all licensees within the scope of the Secretary of State’s power to make them responsible for decommissioning an installation in any part of the licence area. Naturally, companies that have not had an interest in the installation are reluctant to carry a liability for its decommissioning.

I understand that view, and would like to explain how our policy tries to reflect the different standing of licensees. It might be helpful to see the policy as being based on three tiers of liability. The first tier comprises those who have been served with a section 29 notice to establish their statutory obligation to decommission an installation. That will include the current field players and any previous partners who have sold their interest but have not had their notices withdrawn by the Secretary of State because of concerns about the financial strength of the remaining partners.

The second tier includes previous partners who have sold their interests and have had their section 29 notices withdrawn by the Secretary of State at an earlier stage, and are therefore not obliged to submit a decommissioning programme. The third tier comprises licensees who have never had an interest in the installation or been served a section 29 notice.

Our policy is that decommissioning should be carried out by the companies that are currently responsible for the installation: the current field partners in what I call the first tier. Our proposals in the Bill include measures to strengthen the arrangements for ensuring that those companies are able to carry out the decommissioning. If a financial assessment of the first-tier section 29 notice holders indicates that they might have difficulty funding the decommissioning, provisions in the Bill will  enable the Secretary of State to ask for security, such as a bank’s letter of credit, at any time during the project from any of the first-tier notice holders.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I wonder whether it would be helpful for me to make a little more progress.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

My point relates specifically to the issue to which the Minister has just referred.

It is common practice now within the North sea for different people to own and use the rigs, so there are people who develop businesses by constructing the rigs and hiring them out to others. In those circumstances, who would be responsible for the decommissioning, the contractors or the owners?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I hope to come back to that point in due course, as I certainly understand the hon. Gentleman’s description of where the industry is.

As I was saying, with the provision to cover the higher-risk cases, there should be little chance that the current field partners will fail to decommission the installation. However, in the unlikely event that those companies do default, the Secretary of State would have to call on other notice holders in the first tier, and if those fail, on those in the second tier. That would cover the companies that were responsible for the installation until they sold their interest and would, we believe, provide a kind of belt-and-braces approach that should cover all but the most exceptional circumstances.

We have had only two instances in the past 20 years when first-tier companies have been unable to meet their decommissioning responsibilities, but I cannot assure Parliament that our policy will cover 100 per cent. of cases. There is the very remote scenario in which the second-tier companies might also fail. On a multi-block licence, the question would then be whether the taxpayer must step in or whether the Secretary of State should call on the third-tier companies to do the decommissioning work. The new clause would remove that choice of accessing the third tier and mean that—I emphasise this point—the taxpayer would have to fund the decommissioning in that remote scenario.

It is clear from the breadth of existing powers in the Petroleum Act 1998 that Parliament intended that every effort should be made to ensure that the taxpayer does not have to pay for decommissioning due to the default of companies involved in a field. Our policy is therefore not to rule out the extremely remote possibility that it might be necessary in an exceptional case to use the full powers of the 1998 Act to protect the taxpayer.

It has been pointed out to my Department that the potential liability for third-tier companies on multi-block licences could discourage sales of field interests, but there is an answer to that situation. The industry and my Department have put considerable effort over the past two or three years into developing a new model security deed to deal with decommissioning liabilities. That deed could be used to indemnify third-tier companies in multi-block cases. As the deed has just been launched, ideally I would like some time to see how it beds in.

However, given the interest shown in the proposed new clause, I am prepared to consider that further within the context of the Bill. That will require the examination of hundreds of existing licences to consider the impact of such a change, so it is a considerable undertaking that we need to work on. There are complex commercial arrangements on some of those licences, which make the process more complicated. It is not straightforward, but I am committed to investigating it further, although I emphasise that it will take some time. I cannot give a commitment that that will lead to an acceptance of the proposal, but I hope that, in view of this undertaking, my hon. Friend the Member for Glasgow, North-West will not press his new clause.

I was asked whether the liabilities will be on the owners or the contractors. I am advised that both the owners and licensees will be liable for the decommissioning; they will both be tier 1 bodies.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I am grateful to the Minister for that helpful response, and I am sure that the hon. Member for Glasgow, North-West will be grateful for the Minister’s offer.

Can the Minister tell us a little more about the decommissioning involved? Is it the entire structure, meaning the rig, the pipe work that goes with it and the areas below the sea bed as well? I was part of the British-American parliamentary group trip to Texas last year where BP showed us how it is identifying new reserves under 10,000 ft of water and 20,000 ft of rock.

In circumstances where it is possible to identify and to reach oil and gas reserves that were simply unachievable a few years ago, an enormous amount of pipe work is going to be in the sea bed and the rock beneath it. I do not know whether it is already standard practice for that to be removed at the end of the process or whether it is simply left there. Will the Minister’s decommissioning proposals require the removal of all that infrastructure or simply that above the sea bed?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

My understanding is that it is certainly not just that above the sea bed. I want to get this right, and we might have to return to it or I will write to the hon. Gentleman. I think that, to put it simply, the principle is to do as much as possible. In reality, however, it might not always be possible to remove some very deep infrastructure on the sea bed. I will not pretend that I have been out to a number of oil rigs or that I am an expert.

An important question is what the obligation represents. The ideal principle is that we remove as much as possible, but I do not think that it is always possible to do that 100 per cent.

Photo of Brian Iddon Brian Iddon Labour, Bolton South East

Has my hon. Friend had any discussions with Ministers representing the fishing industry? More and more trawlers that trawl the bottom of the sea are snagging installations. For that reason alone it is important that as much of the debris as possible is removed after the use of these wells.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

Yes, that seems to be the basic principle—the ideal scenario. I have said that I will write to the hon. Member for Wealden, and I will  obviously copy that to Committee members. We need to establish what the regulatory framework desires and also what the practice has been in the recent past. I understand the concern. I can assure my hon. Friend that although I have not raised that issue with my colleague in the Department for Environment, Food and Rural Affairs, only yesterday I was talking about matters of mutual interest on the marine environment and my concerns as Minister for Energy. I will certainly raise that issue with him.

We are into an era where there is much competition for sea and marine resources. The hon. Member for Wealden asked about shipping; this is a fisheries aspect of shipping. There are now aspects of marine life that touch on different areas of Government and we need to co-ordinate wherever possible. I am advised that wells are sealed and made safe, and that wellheads are fully removed, which seems a fairly definitive answer. If I need to add to that, I will pursue my ambition to write to the hon. Gentleman.

Photo of John Robertson John Robertson PPS (Dr Kim Howells, Minister of State), Foreign & Commonwealth Office

I thank the Minister for his extensive answer and I look forward to hearing his deliberations on Report to see how we go. I reserve the right to bring back my new clause, but I will not press it.

Question put and agreed to.

Clause 67 ordered to stand part of the Bill.