As the global petroleum industry matures, an increasing number of projects are fast approaching their end of productive lives. In Australia currently, the decommissioning legislative framework has only been applied to smaller operations and is yet to be tested on larger projects. Over the next 50 years in Australia, the estimated decommissioning liability amounts to USD 21bn. In anticipation of a substantial number of the 136 fixed oil and gas facilities in operation being decommissioned in the coming decade, the Federal Government is reviewing its policy, regulatory and legislative framework. How will this impact Australia’s oil and gas producers and will this provide the much sought after certainty the market is demanding or will it remain an ambiguous number in a company’s long-term liabilities, always provisioned for but never called upon?
The NOGA saga
The issue of decommissioning, and who is ultimately responsible, came to the forefront of people’s minds in mid-2019, when the owner of the Laminaria-Corallina oil field—North Oil & Gas Australia (NOGA)—went in to voluntary administration. NOGA had purchased the field from Woodside in 2016 for an undisclosed sum (the ‘Australian Financial Review’ named the price a “peppercorn”). But along with the asset came a USD 156mn abandonment provision.
Late-life asset sales in oil and gas are not uncommon, particularly in the North Sea where the aim of a smaller operator is to run the asset with very low overheads, squeezing the asset dry and generating enough cash to cover remediation while still turning a profit. After three years of ownership, the regulator NOPSEMA (National Offshore Petroleum Safety and Environmental Management Authority) determined the floating production storage and offloading vessel (FPSO) had not been maintained to an adequate level and NOGA didn’t have the funds to bring it up to scratch. The transaction and title transfer was approved by NOPSEMA, which had the right to assess whether the acquirer had the financial capacity to fulfil its obligations. The asset is now in ‘lighthouse mode’; the FPSO vessel is idle but safely standing watch over the offshore fields with the cost seemingly being borne by the Australian taxpayer.
The current state of play
At the moment, Australian oil and gas companies are expected to provision for future abandonment and restoration. They do so by estimating the end-of-life date and the cost of the work required, then discount these future cash flows to today’s value. The shortcoming is that these estimates are long-dated and little tested in reality. The operator also factors in an assessment of the impact of future legislation and technologies on the cost of rehabilitation, which may result in lower provisioning.
This would increase stock valuations as we explicitly deduct restoration from our sum-of-the-parts valuation.
Current legislation calls for the complete removal of property unless an alternative approach demonstrates equal or better environmental outcomes. In its submission to government on the…