IEEFA: Australia’s US$40.5 billion clean up bill for its offshore oil and gas industry

Much of the cost will fall on the Australian government via the tax system

Australia’s US$40.5 billion clean up bill for offshore oil and gas wells and facilities will cost US$40.5 billion, with half of the work starting this decade, according to a report produced with the support of major Australian operators.

It has been common practice in the industry to continually delay decommissioning

Equipment to be removed includes 57 platforms with a total weight of 755,000 tonnes, equivalent to the steel in 14 Sydney Harbour bridges.

There are also 11 floating facilities, 6700km of pipelines, 1500km of umbilicals and more than 500 subsea structures. The industry has about 1000 wells to plug and abandon to seal them forever.

The report by engineering consultancy Advisian was commissioned by the Australian Government body National Energy Resources Australia (NERA) in cooperation with major offshore operators including BHP, Chevron, ExxonMobil, Santos and Woodside.

The enormous liability accumulated since ExxonMobil drilled Australia’s first offshore well in 1965 has been revealed just months after two moves to tighten offshore decommissioning regulation.

In December 2020, offshore regulator NOPSEMA gave notice of stricter enforcement of existing regulations and has separately directed Italy’s ENI and local gas giant Woodside to decommission two poorly-maintained disused fields in Western Australia by fixed dates.

Equipment from ENI’s Woollybutt oilfield, some 80km off the northwest coast, became a marine hazard, and NOPSEMA is investigating if Woodside broke the law with its lack of maintenance of the Enfield oil field, about 49km off the coast of Exmouth.

It has been common practice in the industry to continually delay decommissioning.

Also in December, Australian Government Resources Minister Keith Pitt flagged increased scrutiny of the financial capability of owners of offshore titles and the introduction of trailing liabilities that make previous owners liable if the new owners cannot afford to decommission at the end of field life.

Trailing liabilities were recommended by veteran UK oil and gas regulator Steve Walker who the Australian Government commissioned to investigate the failure of the owner of the Northern Endeavour oil vessel in early 2020.

In 2016 Woodside paid a small inexperienced newly-formed one-man company Northern Oil and Gas Australia (NOGA) to take over the Northern Endeavour, permanently moored 550km northwest of Darwin. With the deal, Woodside and its partner transferred a decommissioning liability estimated by Woodside to be US$260 million.

The deal was legal. Existing regulations did not allow for financial scrutiny of the new owner if the company named on an offshore title was unchanged.

Unreliable production, safety issues and a lack of liquidity saw NOGA enter administration in September 2019 before being liquidated six months later.

Looking after the Northern Endeavour during 2021 and preparing it for decommissioning will cost the Australian Government $A144 million. A bigger bill will follow.

A bigger bill will follow

If recent changes ensure decommissioning is not delayed and owners have the financial capacity to pay, the $US40.5 billion spend over the next four decades is still a huge financial issue for the Australian Government.

Deductibility for company income tax could lead to 30% of the cost falling to the Australian taxpayer.

Projects that have paid substantial amounts of Petroleum Resources Rent Tax (PRRT) for the oil and gas extracted are eligible for a PRRT refund when decommissioning occurs that could take the total government share of decommissioning costs to 58%.

This higher government burden may happen for ExxonMobil’s Bass Strait operation, but the more recent LNG projects may never pay substantial amounts of PRRT.

Both industry and the Australian Government could save many billions of dollars if decommissioning costs were reduced.

The US$40.5 billion cost is based on the legislative requirement that all structures are removed from the ocean. NOPSEMA requires this to be the basis for planning field development but may allow equipment to remain if that “delivers equal or better environmental outcomes compared to complete property removal”.

Advisian estimated that if 5000km of larger pipelines were left on the seabed, so-called in situ decommissioning, US$5.9 billion could be saved.

If 5000km of larger pipelines were left on the seabed, US$5.9 billion could be saved

Woodside submitted a plan to NOPSEMA in April 2020 to leave all pipelines, umbilicals and wellheads from the Echo Yodel development on Australia’s North West Shelf on the seabed and save up to A$160 million. However, the plan left 400 tonnes of plastic in the pipeline coating and umbilical in the environment.

In most cases, to pass the test of “equal or better environmental outcomes”, operators will need to demonstrate that the immediate benefit of marine growth on subsea equipment outweighs the longer-term risk from plastic degrading and chemicals leaching into the water.

“The starting point is that everything should be removed, and it’s up to the companies to justify whether in situ or full removal is the appropriate course,” says NERA general manager of decommissioning Andrew Taylor.

NERA and the seven  operators have funded the National Decommissioning Research Initiative (NDRI). Research is underway on both the benefits of leaving offshore structures in the ocean as support for marine habitats and the longer-term risks from the breakdown of plastic and from naturally occurring radioactive materials (NORMS) that can collect in pipelines and equipment.

As well as leaving larger pipelines on the seabed, Advisian identified possible savings from improved ways to plug wells (US$4.1 billion), towing instead of lifting some platforms (US$1.5 billion), and setting up facilities in Western Australia to avoid towing equipment to Asia (US$1.5 billion).

NERA today launched the Centre of Decommissioning Australia (CODA) with funds from the operators.

They plan to reduce decommissioning costs by at least 35% and maximise local companies’ engagement. The UK is working towards a similar cost reduction.

“There is an urgency in trying to identify and implement those settings that are going to maximise value to Australia from these activities,” Taylor said in reference to half the work estimated to start before 2030.

The US$40.5 billion cost estimate from Advisian excludes the decommissioning of onshore LNG and domestic gas plants that process offshore oil and gas, future construction, and all facilities associated with onshore production.

By IEEFA guest contributor Peter Milne.

This commentary first appeared in Boiling Cold.

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