SCHOOL OF SOCIAL SCIENCES

CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND

POLICY –CEPMLP-

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Section 1 To be completed by Student:

ACADEMIC YEAR: 2019/2020
SEMESTER: 2
STUDENT ID: 1800019660
MODULE CODE: CP51039
TITLE OF PAPER: IS DECOMMISSIONING IN TERMS OF A PSC THE SAME AS
DECOMMINSSIONG UNDER A LICENCE?

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IS DECOMISSIONING IN TERMS OF A PSC THE SAME A S DECOMMINSSIONG
UNDER A LICENCE?

ABSTRACT: Offshore decommissioning obligation of the states under international public

law is usually cascaded down to investors in oil and gas production sectors through various
petroleum contracts. This paper examines decommissioning obligations under the licensing
petroleum regime in comparison to the decommissioning Obligations under the Production
Sharing Contract regime. The conclusion drawn is that in practice the decommissioning
obligation lies with beneficiary of the oil and gas irrespective of the contract regime

WORD COUNT

PRESENTED TO STEVEN DOW.

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 TABLE OF CONTENTS

ABREVIATIONS …………………………………………………………………...3

1. INTRODUCTIONS ……………………………………………………………… 4

2. THE CONCEPT OF DECOMMISIONING ……………………………………5

2.1. Definition…………………………………………………………………….

2.2 General decommissioning obligation principle …………………………….

3. DECOMMSIONING IN THE PRACTICE:

3.1 Decommissioning under license regime……………………………………… 7

3.1.1 The General concept in licensing ……………………………………

3.1.2 Decommissioning obligations in Norway……………………………

3.1.3 The UK decommissioning regime in Practice…………………………10

3.1.4 Who has the decommissioning liability in the UK……………………

3.2 Decommissioning under PSC regime…………………………………11

3.2.1. The general concept PSC regime …………………………………………

3.2.2 Title to assets and general decommissioning obligation …………………

3.2.3 The Kenyan PSC and the Petroleum Act 2019……………12

4. CONCLUSION …………………………………………………………………….14

REFERENCES ……………………………………………………………………...15

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 ABBREVIATIONS

DRD DECOMMISSIONING RELIEF DEED

DSA DECOMMISSIONING SECURITY AGREEMENT

HC HOST COUNTY

NCS NORWEGIAN CONTINENTAL SHELF

NOC NATIONAL OIL COMPANY

PSC PRODUCTION SHARING AGREEMENT

UK UNITED KINGDOM

UKCS UNITED KINGDOM CONTINENTAL SHELF

UNCLOS UNITED NATIONS COVENTIONS ON THE LAW OF THE SEA.

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 1. INTRODUCTION

The clamor for Decommissioning in the recent past been has a result of the fact that states
are now in face with the reality that, some oil field are no longer economically productive and
there is need to decommission them in compliance with the international law standards.1
Decommissioning envisages removal of the oil and gas installations from both on shore an
offshore. However, the process of decommissioning the wells onshore is very simple as it
involves plugging of wells that have ceased productions. This paper shall focus on
Decommissioning offshore which is more expensive, and its obligations arise from
international law.

The objective of the author is to establish who has obligations to bear the cost in removing oil
and gas installation in the sea bed of continental shelves under the license and PSC regimes.
This would have an impact in oil and gas production because Decommissioning costs have
been a major concern for both the governments and the industry. The challenge being how
make sure the very high cost involved in decommissioning are paid without compromising the
investment rate of return.

The paper will look at the how the decommissioning obligations are apportioned under
petroleum contracts and find out is a difference in decommissioning obligations provided under
a license regime compared to a production sharing contract.

To achieve the set objective, the paper has been divided into the four sections. The first sections
look at the ideal established principle on the obligation for decommissioning. The second
section looks at the decommissioning under a license regime with a specific reference to the
UKCS to find out how decommissioning is dealt with. The third section examines
decommissioning under a PSC focused on the Kenyan PSC regime . Lastly the paper concludes
by drawing the similarities in the regimes in practice and concludes that the two
decommissioning regimes converge at establishing the principle that the beneficiary of the
production bears the responsibility to decommission.

2. THE DECOMMSIONING OBLIGATION CONCEPT

2.1 Definition

The concept of decommissioning under International Law encompasses complete or partial

removal of the offshore oil and gas installation from the sea.2 The need for decommissioning
arises at the end of a production life cycle of an oil field when the reserves in a field have
depleted. The removal of the installation could complete, partial or could involve
commissioning some of the installations for other uses.

Authors have argued that the both decommissioning, and abandonment could be used
interchangeably.

1
Cameron, Peter D. Decommissioning of Oil & Gas Installations: A Comparative Approach to the Legal &
Contractual Issues. New York: Barrows, 1990. Print. AIPN Study.
2
Erica J Techera, John Chandler, Offshore installations, decommissioning and artificial reefs: Do current legal
frameworks best serve the marine environment? < https://www.journals.elsevier.com/marine-policy> ‘accessed
30 April 2019’

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“The word “decommissioning” simply means to take out of service. Somewhat surprisingly it
is not generally defined in legislation, which may be a contributing factor to its confusion
with removal and disposal, which are two possible processes in decommissioning, and
sometimes with abandonment. The word “abandonment” means leaving finally and
completely. It is an expression used particularly where a well is to be closed permanently,
when it will be “plugged and then abandoned”. But sometimes in the petroleum industry the
words “decommissioning” and “abandonment” are used as alternatives, which is
unfortunate given their very different resonances”.3

Under International Law as we shall see shortly decommissioning involves not only removal
but also making the environment safe for future economic use. For the purposes of this paper
therefore decommissioning will be used to mean abandonment as well.

2.2 The General Decommissioning Obligation Principles

The general Decommissioning legal regime is founded on International law. It the

International Law that sets out the basic framework for Decommissioning and the standard
required. In relation to offshore installation, Article 5.5 of the Geneva convention4 provides
that “Any installations which are abandoned or disused must be entirely removed.

It is clear the that the Geneva Convention a strict obligation for complete removal of all the
oil and gas installations in the sea bed5. However, the subsequent convention relaxed the strict
complete removal requirement. The UNCLOS6 provides that “Any installations or structures
[in the exclusive economic zone] which are abandoned or disused shall be removed to ensure
safety of navigation, taking into account any generally accepted international standards
established in this regard by the competent international organization”7

The UNCLOS is silent on the degree of removal and this been a subject to debate on what
whether the provisions of the UNCLOS anticipated for partial removal. They conflict with the
provision for complete removal under the Geneva convention, however it is now settled that
by the Vienna Convention8 that UNCLOS takes precedence over the Geneva Convention9 Be
that as it may that is not a subject under discussion in this paper, suffice to say there is an
obligation for removal of the oil and gas installations in the Continental Shelf under
International Law, whether partial or otherwise depending on what the in best interest for the
country.

The obligation to decommission as outlined above arises from the right the granted to the States
under Article 60 of the UNCLOS, to construct and authorize construction or operation and use
of the artificial installations and structures in furtherance of their right to explore and exploit
resources in the Continental Shelf.

3
Ibid
4
Convention on the Continental Shelf Done at Geneva on 29 April 1958.
5
Ibid
6
1982 United Nation Convention on the law of the sea
7
Ibid Article 60(3)
8
Vienna Convention the Law of Treaties adopted in 1969
9
Marc Hammerson and Books Dawson, Oil and gas decommissioning : law, policy and comparative practice
(London : Globe Law and Business 2013)

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The decommissioning obligation principle is therefore that States which have right to construct
have obligation to decommission. The principle deduced out this scenario is that the owner of
the installation is obligated to remove it. This obligation has some foundation on the fact that
installations are form of environmental hazards with serious environmental impacts and
therefore the applicability of the ‘Polluter pays principle’ would ideally make the owner of
the installation bear the decommissioning liability.

It can be said that indeed it is owners of the oil and gas equipment and installations who have
the obligation to bear the cost for decommissioning. This is the default position in the absence
of any other arrangement and therefore the general principle on the liability to decommission.10

3. DECOMMISSIONING OBLIGATIONS IN PRACTICE

States in their efforts to comply with the International Public Law obligations, have enacted
legislations and regulations to deal with decommissioning. Most of regulations have grappled
with trying to create incentive to the investors and making sure that decommissioning liability
is not left to be borne by the tax payers.11
This section examines the oil gas industry in practice in both the license and production sharing
contracts with a keen interest of determining who bears the cost for decommissioning the said
regimes and whether there is a shift from the set principle where the owner is liable.

3.1. Decommissioning under the License Regime

In a licensing regime, the license confers rights to the licensee to explore and exploit natural
resources in the area covered by the license. The licensee pays all the costs associated with the
productions and taxes that have set the Petroleum fiscal regime of the Host Government12 The
licensee is expected to erect oil and gas installations and oil and gas forms pursuant to the rights
in the license. The government interest is only in the tax and royalties as such the licensee in a
typical licensing regime owns the installation and is therefore has the obligation to
decommission at the end the production life of the field13

Before moving the practice in the UK, the author takes take a glance at the North Sea to cement
the general argument on the obligations for decommissioning under a license. The Norway
has concessionary petroleum regime and is governed by the Act of 1996 Relating to Petroleum
Activities.14 The Act provides in its chapter five that the responsibility to decommission is
vested with licensee. Provisions under section 5(3) of the Act makes the owner and the licensee
the responsible jointly for disposal in an event of a transfer or assignment. 15

10
Ibid 15
11
Peter D. Cameron, Decommissioning of oil & gas installations : a comparative approach
to the legal & contractual issues (New York : Barrows 1990)
12
Oliveira M.R. ‘The Overhaul of the Brazilian Oil and Gas Regime: Does the Adoption of a Production
Sharing Agreement Bring Any Advantage Over the Current Modern Concession System?’ (Vol.8 2010)
<https://www.ogel.org > Accessed 1 May 2019
13
Ibid 20
14
Act 29 November 1996 Relating to Petroleum Activities in Norwegian.
15
Cameron (n- 11) 18

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 Further section 5(4) Acts provides for a possibility of the government taking over the
decommissioning liability based on an agreement with the licensee upon a financial
compensation which ideally will does not change the obligation to pay for decommissioning
under 5(3) above16.
Therefore, The Norway provisions on decommissioning liability and obligation mirror the
basic principle on decommissioning obligation under a license regime where owner retains
liability and any transfer of the license without transfer assets does relief the owner of the
liability to decommission unless the asset is transferred separately after the assignment of the
license.
However the Norwegian Tax regime governed by the Petroleum Tax Act provides for 78% in
cash tax refund on the decommissioning cost.17 It is in effort to give incentives to investor
licensees in the NCS which has makes the government to allow to the operators apply the
“Realization Principle” a procedure that allows the government to give tax reliefs on the
decommissioning expenses when the obligation to decommission has been completed. This
done through the cash refund process.18

It is thus noteworthy to say that; the Norwegian government participates in decommissioning

of oil and gas installation that it does not own.19 This is a shift from the default principle
position the owner pays.

3.2 The UK Practice.

The UKCS decommissioning regime is base on a license. The license in the UKCS is in form
of a Contract that governs relationships between the state and the oil companies.20 The UK
government does not participate in the oil and gas production. It does not own equity in the
production at the Continental shelf as was earlier when it had a state company.21
The states exclusive rights to explore and exploit resources in the continental shelf under
International Law is exercised through the licensing.

The licensing regime is usually governed the Petroleum Act22 The license incorporates the
Regulatory provisions of the Petroleum Industry by way of the Model Clauses which are
standard and provide a wide range of control ideally supported by the provision of the
Petroleum Act. 23

16
Ibid (n 11) 18
17
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Energy-and-Resources/gx-er-
oil-and-gas-taxguide-norway.pdf
18
Spieler J.O. Monge Oia T. “Plug and Abandonment Status on the Norwegian Continental Shelf
Inclusive Tax Consequences” Vol.3 2015 <www. ogel.com > ‘accessed 30 April 2019’
19
Park MOI and Patricia, 'Evolution of international law on the decommissioning of oil and gas
installations' (2001) International Energy Law & Taxation Review 199
20
Ibid at page 19
21
Hammerson and Dawson, Oil and gas decommissioning : law, policy and comparative practice
22
UK Petroleum 1998 as amended by the UK Energy Act 2008.
23
Hammerson and Dawson, Oil and gas decommissioning : law, policy and comparative practice

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Regarding decommissioning the Model clauses call for a Secretary of State’s approval of the
decommissioning plan. However, is has been argued that the UK Government tends to rely
more on the statute than the model clause when it comes to decommissioning provisions.24

The UK legal and contractual framework allocates cost and risk associated with
decommissioning through a hierarchy of obligations. The anchoring of the decommissioning
liability in the statute makes it is capable of enforcement as it the only remedy under the
license would recall or forfeiture of the license, but since decommissioning happens at the till
end of productions forfeiture would not a proper safeguard and Parties would escape
liability easily because it difficult for states to prove loss under a breach of contract claim.25

3.2.1 Who is Responsible decommissioning liability in the UK

The Petroleum Act26 empowers the Secretary of State to issue a wide range of players in the
industry with a decommissioning Notice making responsible for decommissioning. Section
30 of the Petroleum Act outlines the person who maybe served with the notice It refers
following groups people:
i. Managers of installations and parties with right of use installations and the
right to explore mineral resources
ii. Parties to a joint operating agreement in relations rights granted for use of
installations right to explore and exploit resources and any person who owns
interest in any of the installations
iii. Any company that is associated with managers of installation who with the
persons with the rights to explore and exploit resources and the Owners of
pipelines and the persons who own interest the pipelines and companies
associated with them.
The provisions of the sections 31 of the Act27 are to affect that being a licensee is not
generally a basis for being held liable for decommissioning under section 29. The Notices
are first targeted to the operator who have the beneficial interest in the installations.28

To deal with overlapping liabilities in the industry parties who have a duty and the section
29, come together and enter into a decommissioning security agreement 29. Under the DSA
the parties provide cross indemnities and cushion themselves against the liabilities to pay the
decommissioning costs by providing decommissioning security. Initially there was no law
providing parties to enter into a DSA, this done out necessity. However, the Finance Act30
has made it a requirement for parties to provide security for decommissioning of wells drilled
after 26th of January 2009 and the practice is to have the DSA incorporated in the JOAs31

However, section 38 empower the secretary of state to look financial documents after the
decommissioning programme has submitted to ascertain whether the party can discharge the
obligation. Where the Secretary of state is convinced or satisfied may the party to take a

24
Ibid 13
25
Hammerson and Dawson, Oil and gas decommissioning : law, policy and comparative practice
26
UK Petroleum Act 1998 S29
27
ibid
28
Hammerson and Dawson, Oil and gas decommissioning : law, policy and comparative practic at pg 75
29
Ibid (n 25)
30
UK Finance Act 2014 S. 45A
31
Hammerson and Dawson, Oil and gas decommissioning : law, policy and comparative practice pg76

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necessary action to remedy the situation which could amount to providing security for
purposes of certainty32.

The security provided by each party is proportional to its interest in a joint operating
agreement and it should inform of either an Irrevocable Letters of Credit, a Bank Guarantee,
a Performance Bond, Insurance, Parent Company Guarantee or payments of cash money into
a trust fund to be operated to cater for Decommissioning cost 33

Where there is transfer of an asset is made, the seller may be served with notice under section
34 of the Act. Therefore, the purchaser is obligated to provide security against his default in
meeting the decommissioning cost to cushion the seller from decommissioning liability. The
security would normally be set out in the sale and purchase agreement34

The operator being the person with responsibility of carrying out the day to day operations is
usually is usually the custodian of the security provided and in case of cash payment into trust
it operates the trust for purpose of paying the decommissioning cost. However, cash
payments are not normally preferred due facts parties are reluctant in tying up the already
limited cash which required to pay for cash calls.

The UK government though it does own any installations in the UKCS it participates in
payment of decommissioning cost through tax relief. The Finance Act35 introduced a
decommissioning relief deed to deal with tax relief. According to one author: -

“The DRD enables the company to provide security for based on post tax rather than
pre -tax basis” 36

This reduces the amount paid as security for decommissioning cost. Currently the UK
government has capped decommissioning tax relief at 50% and at 75 for PRT fields and
government in 2012 made a commitment to enter into contracts with companies that that
would see it commit to repayment tax relief to bring certainty to the area and create
confidence to the investors.37 It is therefore clear that government has a liability for
decommissioning cost as well.

It can therefore be said that in the UKCS, the decommissioning liability is expanded through
Petroleum legislation and the old principle where the it is the owner of the asset should have
liability to decommission has been derogated by legislation and is not applicable in the UK.

The established practice in UKCS is to make anyone with beneficial interest in the in
installations liable for payment of decommissioning cost.38

32
Ibid 76
33
Cameron, Decommissioning of oil & gas installations : a comparative approach to the legal & contractual
issues
34
ibid (n 24) 75
35
UK Finance Act 2014
36
Marie-Claire O’Hara and Marie-Claire O'Hara, 'The legal and regulatory framework governing offshore
decommissioning' (2015) 31 Construction Law Journal 122
37
Ibid (n 32) 93
38
Cameron, Decommissioning of oil & gas installations : a comparative approach to the legal & contractual
issues

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3.2 DECOMISIONING UNDER A PSC REGIME

The PSC Concept

In typical PSC regime Host government (HC) its oil company (NOC) enters into a Contract
with a Contractor who usually an International Oil Company (IOC). Under the Contract the
IOC bears the risk of explorations and productions. Where no discovery is made the IOC
bears the loss alone as indemnity is provided by the HC.

However, where a commercial discovery is made, the IOC is allowed to recover its the cost
incurred in exploration and production through a share of oil called the “cost recovery oil”
The government is entitled royalties which a set percentage of the Gross production.39 The
amount of oil remaining after making two deductions above is called “profit oil” and shared
between the IOC and HC in accordance to predetermined percentage agreed in the PSC with
the IOC ‘s share being subjected income tax.
The objective of PSC regime is to give the government more control in the petroleum
operations. The contractor under PSC has no title to oil and only entitled to renumerations in
kind upon successful discovery.40

Title to assets and the decommissioning liability generally

The asset purchased by the contractor and the installations erected by the contractor for
purposes of exploration and production are property of the state. This is because the cost
incurred in their purchase is normally cost recoverable as “Cost oil” and transfer is instant
upon the assets getting into HC states territory or upon recovery of the cost incurred41 in the
purchase by the IOC from “Cost oil.”

It expected that the Host State should bear the decommissioning obligation at the end of the
PSC simply because it is the owner of the assets. Further it will quite illogical practically to
have the contractor pay for decommissioning at the end of the productions period when the
cost cannot be recovered. This had posed a challenge in the industry as in earlier PSC
government felt the contractor had to participate in decommissioning as the cost are huge. In
the recent PSC including the Azerbaijan PSC the provides establishment of an abandonment
fund.42 According to Azerbaijan PSC, the parties are at liberty to agree on how the fund
shall be administered and the monies paid into fund by the contractor are recoverable as
operations cost43.

This contractual arrangement makes the cost of operations making the projects less profitable
to the contractor. In real sense the contractor contributes in paying for decommission of
assets they don’t own.

39
Oliveira M.R. ‘The Overhaul of the Brazilian Oil and Gas Regime: Does the Adoption of a Production
Sharing Agreement Bring Any Advantage Over the Current Modern Concession System?’ (Vol.8 2010)
<https://www.ogel.org > Accessed 1 May 2019
40
Ibid54
41
Cameron, Decommissioning of oil & gas installations : a comparative approach to the legal & contractual
issues pg 32
42
Ibid at pg32
43
Ibid

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 3.2.3 The Kenyan PSC and the law on Decommissioning Liabity

Kenya made commercial discovery in 2012 and the news were recived with jubilations and
high expections by the kenyan. It is expected that oil procceds will spur the economic
development which has been depended on agriculture since independence. The author will
not focus the realizations of the expections now.

The Petroleum regime in kenya is now governed by the Kenya Petroleum Act44 which was
signed into law in March 2019. Due fact there was law suffiiently covering decommissiong
issue the Model PSC which gazzeted long before the Act was enacted is elaborate on
decommissioning provsions.

Decommsioning Obligation under the PSC

The kenyan PSC establishes Dollar interest bearing escrow account held jointly by the
contractor and government and to funded by Contractor . The monies deposited in the
decommising fund account shall be cost recoverable by the contractor. However where the
production is not able to cover the cost decommissioning the government and contractor
shall be liable to pay for decommissioning from their own monies.

It is further provided under the PSC where the government has a participating interest it will
give a proportinate amount to kept in the decommssioning account. The PSC obligates the
contractor to make book sufficient funds in the cater for cost of decommissioning and to
review the estimated cost periodicaly and summit a report to Upstream Regulatory
Authourity (UPRA) fro approval.
This an indication the contractor is at the has a greater obligation for decommisioning as
they expected to submit decomisioning plans before starts of operations under the Psc.

The Obligattion under the Petroleum Law45

The kenya Petroleum Act as earlier stated was enacted after the Model PSC was gazzeted.
It incorporates the provisions of Model PSC which a schedule to it. Section 66 requires the
contractor to submit a Decommisioning Plan before a production permits to install and
operate faicilitis is issued46.

Section 67 establishes a decommissioning fund to be servised by the contractor and operated

to cater for the implementation of the approved decommissioning plan.47 The Petroleum
seems further provides the amount paid by contractor to the decommissioning fund shall cost
recoverable . However in event that the funds are not sufficient the owner of the facilities
and contractor shall pay for extra cost incurred.

The management of the decomissioning fund is entrusted to both the National Government
and the Contactor through a committee of its representatives.

44
Kenya Petroleum (Exploration, development and Production) Act 2019
45
Ibid
46
Kenya Petroleum (Exploration, development and Production) Act 2019
47
Ibid

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The kenyan PSC regime provides for shared liablity between the the contractor and
government which ideally the owner of the the installations. The contract and law overides
the principle of the owner pays adoptes the principle whoever has the benefits should bear
liability of decommissiong.

4. CONCLUSION
In an effort to to balance between keeping the investors incentivized and deal with huge cost
involved in decommsiioning. States have had make spefic provisions for decommssioning
their laws allocating liability for decommsionning to the persons who receive benefincial
interest from the productions of hydrocarbons irrespective the the Petroleum contract
regime.

The ratiole behind this approach is make the cost of decommissioning affordable through
sharing of liablitie among a number parties who benfited and make sure the state is left to
pay for decommsioning in compliance with International public Law using taxpayers money
long after hydrocarbons are depleted. Therefore as as decomissioning obligations are
concerned the regime does matter and thus decommisioning under a licence regime is the
same under a PSC in practice.

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 BIBLIOGRAPHY

Cameron PD, Decommissioning of oil & gas installations : a comparative approach to the
legal & contractual issues (New York : Barrows 1990)
Hammerson M and Dawson B, Oil and gas decommissioning : law, policy and comparative
practice (London : Globe Law and Business 2013)
O’Hara M-C and O'Hara M-C, 'The legal and regulatory framework governing offshore
decommissioning' (2015) 31 Construction Law Journal 122

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