Full Title: Counting the cost
Author(s): Marc Hammerson, Partner, and Nicholas Antonas, Associate, Akin Gump Strauss Hauer & Feld, London,
Publisher(s): Petroleum Review
Publication Date: October 1, 2016
Full Text: Download Resource
Description (excerpt):
Financial distress has been a feature of the oil and gas industry since the precipitous fall in commodity prices in 2014. Licensees owning mature offshore fields have been frequently worst affected. The longevity of an asset is linked to declining reserves, falling rates of production and high costs. Mature fields are, as a result, often described as being marginal. Additional unbudgeted costs such as a decommissioning payment can have a significant impact on the economics of a marginal field. After a field reaches cessation of production, redundant equipment must be removed. Licensees of depleted fields bear these costs. Prudent stewardship requires that future costs are provisioned out of historic production. In other words, money is periodically put aside for the future costs of decommissioning whilst the field is generating revenue. Such forward-thinking financial planning represents good industry practice. Often it is also encouraged by applicable regulations. A government’s interest in this activity is motivated, in part, by its compliance with international laws designed to protect the environment and users of the sea. As a result of these multilateral obligations, upon a decommissioning default by licensees, a host government would be required to assume responsibility. The industry’s current financial distress means that governments (often
acting through their regulators) are particularly concerned to ensure that financial provisions put in place are adequate to meet future obligations. Decommissioning is in its infancy. With oil prices showing no immediate sign of returning to previous levels, and with a significant number of fields due to cease production in the next few years, the regulations in place governing this subject – and the financial provisions to be put in place – are likely to be tested.