21 August 2018

Decommissioning liabilities: a new risk for the Australian oil and gas sector

Unlike many other regions around the world, the issue of decommissioning liabilities is one which is fast approaching E&P companies around Australia.

Earlier this year, the Department of Industry, Innovation and Science released guidelines on the regulatory framework surrounding decommissioning liabilities as several major offshore projects enter or are nearing their decommissioning stage.

The department guidelines note the importance of early planning and outline that the “base case” for decommissioning is complete removal, but in some circumstances, less than complete removal may be possible.

Ryan Mansom, National Practice Leader – Energy at Gallagher, said that the rising risks linked to decommissioning liabilities for the offshore oil and gas sector in Australia present a new challenge for the industry and regulators.

“The interesting part is for the Australian oil and gas sector, because we are relatively new, we haven’t really been exposed to any decommissioning to date but we are heading that way and questions are being asked about decommissioning liabilities,” Mansom said.

decommissioning liabilities insuranceMansom noted that, from an insurance perspective, clients can seek cover to lessen the burden of decommissioning. Mansom said that a “reverse construction-type policy” can help clients but each decommission is different and can be assisted by an expert broker.

With energy M&As expected to continue at pace over the coming year, and with near end-of-life fields a driving trend, Mansom noted that this also creates challenges surrounding decommissioning.

“These smaller companies entering into these asset acquisitions have to provide some assurance to the sellers and regulators alike that they will be able to meet the decommissioning liabilities because it could happen the day after they take control of the asset,” Mansom said.

“If it happens early and unexpectedly, they have to make sure they are covered appropriately.”

As a new area for the Australian oil, gas and insurance industries, Mansom said that international markets lead the charge when it comes to placement of decommissioning risks.

The UK has been exposed to decommissioning liabilities for years thanks to its oil and gas fields in the North Sea which has seen the London market develop solutions but Mansom noted that Gallagher is currently “deep in discussions” around the launch of new non-conventional product designed to meet the needs of clients with decommissioning liabilities.

Mansom said that the role of a broker is vital throughout the decommissioning process and can help clients secure the best outcome as well as some peace of mind. For oil and gas firms, Mansom said that it is important to contact a broker early in the process.

“We look to speak to clients frequently and during that process,” Mansom continued.

“Decommissioning doesn’t just pop up, clients are aware of it and are trying to extend field life but they are aware that if things don’t go correctly insurance can play a part.”

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