Guest post: Liability lottery of onshore decommissioning

Via Drill or Drop
MAY 11, 2019

KM8 site at Kirby Misperton largely cleared of equipment on 20 March 2018. Photo: Eddie Thornton

Who pays for clean-ups and decommissioning if an onshore operator goes bust? It’s a question that is concerning MPs and landowners. In this guest post, researcher and anti-fracking campaigner, Ben Dean, looks at the rules for decommissioning and argues for tougher controls.
In January 2017, the business secretary, Greg Clark, delayed Third Energy’s fracking plans at Kirby Misperton in North Yorkshire and ordered a test of the company’s financial resilience.

14 months on, Third Energy had declared liabilities of £63.9m and we don’t have a decision on the resilience test. Third Energy’s onshore interests have been sold to a newly-incorporated company with a parent based in the Cayman Islands. And the concerns remain over what happens if an onshore operator cannot pay to repair any environmental damage.

Last month, the Country Land and Business Association (CLA) warned the shale gas industry that fracking would struggle if it didn’t resolve the problem of who was liable for clean-ups. Speaking at a seminar in London, the organisation said landowners needed reassurance that all costs would be covered in all circumstances.

So what are the rules and are they strong enough?

Rules for offshore decommissioning
A good starting point would be to consider what are the offshore decommissioning regulations.

The offshore industry is mature, with many thousands of wells and many decommissioned fields.

Yet there has been relatively little controversy over the decommissioning of these offshore fields.

I would argue this is because of the primary legislation for decommissioning offshore hydrocarbon installation: the Petroleum Act 1998.

Compared with the onshore industry, offshore has no Mineral Planning Authority (MPA) to issue planning permission and require conditions.

So, the 1998 Act imposes on the offshore industry conditions that I believe all MPAs should require on granting any onshore hydrocarbon exploration and development permission.

The 1998 Act requirements for Abandonment of Offshore Installations start in Part IV, paragraph 29.

In paragraphs 38 and 38A, the Act deals with financial resources and protection of funds for an abandonment programme.

In advance of granting permission to drill and develop a field, the Secretary of State requires:

A decommissioning plan
Proof that the operator has funds to be able to decommission the wells and installation infrastructure, including pipelines
Fish and marine life seem to be well protected.

Rules for onshore decommissioning
Let’s now compare the offshore regime with the regulations protecting people who live next to onshore hydrocarbon developments.

The 1998 Act offers no protection for onshore decommissioning.

So who is responsible? Three onshore regulators have separate interests in what happens at the end of the life of a well or field.

Bonds
The MPA – usually a county council or unitary authority – could require payment of a restoration bond, in case the operator went out of business before decommissioning was completed.

The bond could be part of a legal contract, called a Section 106 Agreement, which would become a condition of the planning permission.

But bonds are unusual in planning conditions for onshore sites.

The National Planning Policy Framework paragraph 205 (e) says MPAs should “provide for restoration and aftercare at the earliest opportunity, to be carried out to high environmental standards, through the application of appropriate conditions”.

But the NNPF then adds:

“Bonds or other financial guarantees to underpin planning conditions should only be sought in exceptional circumstances.”


IGas site at Misson, Nottinghamshire. Photo: Eric Walton

Nottinghamshire County Council required IGas to pay a bond, set at £650,000, to cover the cost of site restoration at the shale gas site at Misson Springs. But a similar bond was not required by the council for the nearby shale gas site at Tinker Lane.

North Yorkshire County Council agreed a site restoration fund for Third Energy’s fracking site at Kirby Misperton of £160,000.

But no bonds or restoration funds have been required for onshore exploration sites including Preston New Road, Ellesmere Port, Harthill, Bramleymoor Lane, Horse Hill or Balcombe.

So at these sites, who would pay if the licensee went bust and/or insurers refused to pay on a third party liability insurance policy?

“Polluter pays”
Step up the Environment Agency (EA) and, it appears, the landowner.

In February 2019, senior civil servants were questioned about liability for onshore decommissioning by members of parliament’s public accounts committee (transcript of evidence).


From left: Emily Bourne, Alex Chisholm and Andy Samuel giving evidence to the Public Accounts Committee, 11 February 2019. Photo: Parliament TV

The North East Derbyshire MP, Lee Rowley, asked:

“If the company goes bust, what will happen?”

Alex Chisholm, permanent secretary at the Department of Business, Energy and Industrial Strategy (BEIS) said:

“If the company is no longer responsible or is no longer in existence, anybody else responsible associated with that—so, the Environment Agency, which is not one of our agencies, enforces a “polluter pays” principle.

Committee chair, Meg Hillier MP said:

“That sounds a little vague.”

Alex Chisholm replied:

“Ultimately I think the landowner has responsibility.”

BEIS later wrote to the committee to say if the holder of an environmental permit was no longer in existence, the Environment Agency had the ability to pursue former directors if the holder of an environmental permit was no longer in existence.

The department added that if this were not possible the EA would:

“identify if there were other appropriate parties who could bear responsibility, for example, the landowner.”

Taxpayer
The department’s statement on landowner liability looks straightforward in the context of environmental permits.

But some older oil and gas sites, developed before 2013, have never had an environmental permit. This means the EA has no remit over their decommissioning. The UK Oil & Gas site at Markwells Wood is one example.


Markwells Wood site before the start of decommissioning. Photo: Ann Stewart

And it gets more complicated when you look at the rules on licensing. Here, there is evidence that the taxpayer holds the liability, not the landowner.

Most onshore licences have now adopted the 14th Round Model Clauses.

Section 20 of the model clauses deals with abandonment and plugging of wells.

Paragraph 13 of this section makes it clear that all casings and fixtures forming part of a well and left in position become the properly of the Secretary of State when a licence is revoked or where work has been completed.

I think this clause, in effect, nationalises the liability for decommissioning if the operator went out of business.

Equalising the regulations
So what should be done to bring the protection of people living near wells onshore up to the level of fish and marine life offshore?

In my view, the requirements of the offshore industry to comply with Part IV “Abandonment of Offshore Installations” in the 1998 Act should equally apply to all onshore “Installations”.

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