Offshore oil and gas may finally have to cough up for its $56b clean-up bill

Australia’s big offshore oil and gas players face a massive spend to clean up their act after a federal government clampdown in response to the threat of a $1.2 billion bill to deal with an ageing oil vessel.

Decommissioning wells, platforms and pipelines in Australian waters is estimated to cost $US40.5 billion ($56 billion) to 2050, according to a federal government-sponsored report released in 2020, with half the work starting this decade.

Companies have had three tactics to avoid this cost: sell, delay, or dump by arguing that facilities should be left in the ocean.

In 2015, Woodside played the sell tactic, and it has backfired expensively on the entire industry, with tougher enforcement of decommissioning obligations.

Woodside was preparing to decommission its Northern Endeavour oil production vessel in the Timor Sea then changed plans and sold it to a newly formed one-man company Northern Oil and Gas Australia.

After the sale Woodside reversed a $US95 million impairment on its 60 per cent interest in the asset indicating it and the other owner gained $US158 million ($219 million) from selling the vessel instead of decommissioning it.

Unfortunately, NOGA did not have the financial strength to withstand technical and safety problems that cut production and went into voluntary liquidation in early 2020.

The responsibility for the Northern Endeavour fell to the federal government, which has committed more than $200 million so far to keep the vessel safe and prepare it for decommissioning. Oil and gas lobby group APPEA estimated the total cost could reach $1.2 billion.

However, the bill will rest with the industry, not the taxpayer, after a levy on offshore oil and gas production was legislated in late 2020.

Chevron, which estimated it would pay more than 20 per cent of the levy, said in a Senate submission that NOGA was “obviously lacking the appropriate technical and financial capability” and Chevron and others were forced to subsidise “the failings of companies” that benefited from the Northern Endeavour.

To avoid more Northern Endeavour-like debacles, in December 2020 Resources Minister Keith Pitt tightened checks on the financial strength of buyers of offshore facilities and introduced trailing liabilities that make sellers liable for decommissioning if the new owners cannot pay.

Woodside’s sale complied with the law at the time but under the new regime it either would have been prevented from selling the Northern Endeavour or been forced to pay the bill when the buyer folded.

The changes were a rare case of the fossil fuel industry not getting its way with the federal Coalition government, and have halted a rush by major oil and gas companies to exit ageing Australian assets.

ExxonMobil put its half-share of its Bass Strait operation up for sale in 2019 but canned the process a year later after Mr Pitt told it of the coming legislative changes. Italian firm ENI stopped trying to sell its assets shortly afterwards. Chevron’s stake in the giant North West Shelf project in WA has been shopped around since 2020 without success.

Companies that cannot sell out of Australia are also finding continued delay to decommissioning expenditure difficult.

In 2021, offshore regulator NOPSEMA started issuing directions with fixed deadlines for wells to be made safe and equipment removed. In the future, all wells must be made safe within three years of the end of production with another two years allowed to remove all equipment from the ocean.

BHP was ordered to finish cleaning up the Griffin field off WA that ceased production more than a decade ago. ExxonMobil must plug 180 wells and dismantle 10 platforms at its Bass Strait operation near Gippsland that it owns with BHP.

With selling and delaying becoming more difficult, the industry’s last chance to reduce its $56 billion decommissioning bill is to justify leaving equipment in the ocean forever.

On this issue, the board that advises NOPSEMA thinks the industry is not facing up to its obligations.

“While it has been a legal obligation to fully remove equipment since the 1960s, industry appears to not have had this as the default consideration in their planning, nor have assets been valued on the basis of full removal,” said the minutes of a 2020 board meeting obtained via a freedom of information request.

Woodside has had two recent setbacks to its plans for “in-situ decommissioning”, the industry term for leaving stuff in the ocean.

In April 2020, Woodside proposed to NOPSEMA that 23 kilometres of pipeline and a parallel cable called an umbilical at its Echo Yodel field off WA, that together contained 400 tonnes of plastic, remain on the seabed forever.

Woodside argued that environmental damage from the plastic that could take centuries to break down would be outweighed by the benefit from providing a structure on the seabed for a reef.

It appears Woodside’s reasoning was not accepted and the company now plans to remove both the pipeline and the umbilical, according to a consultation paper it released in November 2021.

The cost to remove this tiny part of Woodside’s offshore infrastructure could be as high as $150 million, according to plans lodged with the regulator.

Woodside also wanted to dump an 83 metre-long piece of equipment on the seabed near WA’s Ningaloo Marine Park as part of an artificial reef. Its original plan to tow it to shore to be dismantled had been made impossible due to its poor maintenance of the structure.

The dumping application was withdrawn in October 2021. The Department of Agriculture, Water and the Environment told a Senate committee it had formed a preliminary view that the plan violated an international convention on marine pollution.

In December, NOPSEMA reminded the industry it is only allowed to leave equipment in the ocean indefinitely if it results in a better environmental outcome than full removal.

Demonstrating this is a high hurdle for companies to justify not fully reflecting the cost of removal on their balance sheets.

If Woodside succeeds in buying BHP’s petroleum division it will likely be heavily impacted by the new more robust approach to regulating decommissioning.

The report by Advisian that estimated the coming surge of decommissioning work to cost $US40.5 billion identified two areas where 74 per cent of the spend will occur: the North Carnarvon Basin off WA’s Pilbara coast and the Gippsland Basin off Victoria.

The BHP deal will double Woodside’s interest in the North West Shelf project that is the biggest owner of offshore infrastructure in the North Carnarvon Basin and give it a 50 per cent stake in ExxonMobil’s sprawling Gippsland facilities.

Woodside’s 2015 decision to save money on the Northern Endeavour may prove costly in the long term.

Read the latest issue of the OGV Energy magazine HERE