Menu
The High Court reminder: Where does liability for decommissioning costs lie?

Insights / / London

You can listen to this article in podcast format here:

 
Apache UK Investment Limited v. Esso Exploration and Production UK Limited [2021] EWHC 1283 (Comm)

Liability for decommissioning costs is one of the greatest concerns for a company carrying out energy-related activities on the UK Continental Shelf. This liability is found in international law and imposed in the UK through the Petroleum Act 1998, which aims to ensure that the UK Government will not bear the significant removal costs of offshore installations.

Under the Petroleum Act 1998, the Secretary of State has powers to extend such liabilities not only to parties that have benefited from production, but also to related parties such as parent companies, affiliates and previous licensees. It is therefore common practice for a company that sells interests in an offshore field to request security from the buyer against future decommissioning costs.

Background

In the recent case of Apache UK Investment Limited v. Esso Exploration and Production UK Limited [2021], the High Court considered a dispute in the context of a Sale and Purchase Agreement dated 21 September 2011 (“the SPA”), between the buyer, Apache UK Investment Limited (“Apache”) and the seller, Esso Exploration and Production UK Limited (“Esso”).

Pursuant to the SPA, Apache acquired 100% of an LLC company which was the licensee in a number of hydrocarbon producing fields in the North Sea (“the Fields”). Apache agreed to indemnify Esso for all potential decommissioning obligations whether arising before, at or after the effective date of the SPA. Accordingly, the parties entered into six Bilateral Security Agreements (“the BDSAs”) detailing, among other things, the process of how the amount of security was to be calculated.

The first issue

Apache’s obligation to indemnify Esso was, at all material times, supported by a guarantee from Apache’s parent company. However, on 26 March 2020 the parent company ceased to be a “Qualified Surety” under the BDSAs. This event triggered provisions of the BDSAs which obliged Apache to:

i) provide further security in the form of Letters of Credit within 10 days of the event; and

ii) within 3 months, submit a proposed decommissioning schedule and budget (the “Proposed Plan”), covering “an estimate of the highest Net Cost during the immediately following Year (such immediately following Year being the “Relevant Year”).”

The Initial Amount of security (as defined in the BDSAs) was substantial, nearing £550 million. It was therefore unsurprisingly in Apache’s interest, amid a global decline in demand for oil, to reduce that amount as far as possible. By contrast, Esso wanted to ensure it was fully secured against any potential liability.

Apache initially provided security in the form of 11 Letters of Credit, for the aggregate of the Initial Amount. It then issued two Proposed Plans to Esso including the highest Net Cost for the years 2020 and 2021. It insisted that the security amount should be recalculated on the basis of the figures of the year 2020, and thus reduced the amount by around £140 million. Esso disregarded the 2020 Plan and contended that the “Relevant Year” upon which the plan should be based was the next calendar year (i.e. 2021) not the year immediately after the day of the event.

Charles Hollander QC, sitting as a High Court judge, ruled for Esso on the basis that the “Relevant Year” was a calendar year – the immediately following calendar year at any given date in 2020 was 2021. This, in his view, made more commercial sense because it encouraged planning for upcoming rather than past years. He found various problems with Apache’s interpretation of Relevant Year, one such problem being that it would potentially render another obligation of the BSDAs impossible to perform.

Nevertheless, he acknowledged the difficulty of reconciling Esso’s argument with provisions of the BSDAs which seemed to be the result of inconsistent drafting, but he noted that it had no effect on the amount of the security to be given. As such, he ruled that the obligation to prepare a Proposed Plan was related to 2021, not 2020.

The second Issue

The second issue concerned Esso’s objections to Apache’s Proposed Plan of 2021. Prior to the effective date of the SPA, the Secretary of State served a number of Section 29 notices on the acquired licensee company (“the Notices”) to submit decommissioning programmes and set out the measures for the abandonment of the Fields. It was common ground that notices served after the SPA came into effect could not hold Esso liable for decommissioning costs. However, Esso’s concern was that the Notices identified Fields installation very broadly, such that they could give rise to an obligation in respect of four wells that were omitted from Apache’s 2021 Plan (“the Additional Wells”). The Offshore Petroleum Regulator for Environment and Decommissioning (“OPRED”) was also consulted and expressed the view that Esso could be liable under the Act in relation to the Additional Wells.

Apache argued that, on proper construction of the Petroleum Act 1998, the Additional Wells could not be covered by the Notices or give rise to such liabilities because they did not exist when the Notices were served, and were drilled for the first time after the effective date of the SPA. Esso, on the other hand, contended that this was immaterial, and the Additional Wells could be captured by the Notices because it was possible to treat an entire Field as an “Offshore installation”. Esso maintained that additional security was required for the potential costs of decommissioning the Additional Wells.

The Court sided with Apache on this issue. It referred to sub-section 44(1) of the Petroleum Act 1998 which defined “Offshore installation” as “any installation which is or has been maintained or is intended to be established for the carrying on of any activity”. Under sub-section 44(5), “installation” included “floating structure or device maintained on a station”. This meant that “Offshore installation” naturally referred to equipment or structure within a field, so it could not mean the entire field.

The Court concluded that the Notices could not have related to the Additional Wells unless there was an intention to construct them when they were served. On the facts, it was never suggested that such an intention existed, plus the last Notice predated the SPA by around 15 years. The Court also clarified that OPRED’s views were not determinative of the Act, nor did they aid its conclusion. The Secretary of State had no power to impose a liability on Esso for the decommissioning of the Additional Wells, and no security was therefore required to be provided by Apache in relation to them.

Comments

The Court’s ruling in Apache v. Esso serves as a reminder that a company (or a company associated with it) selling interests in offshore fields can, subject to the service of Section 29 notices, be liable for decommissioning costs. Not only for existing offshore installations, but also installations that are intended to be established when the notices are served. It also clarifies that the Secretary of State’s powers to determine the meaning of the Petroleum Act 1998 are limited.

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

Tarek Taha

Tarek Taha Associate

Related sectors:

Related news & insights

News / Climate change litigation update: Derivative claim dismissed

06-07-2022 / Energy & Infrastructure

McGaughey & Anor v Universities Superannuation Scheme Ltd & Anor [2022] EWHC 1233 (Ch) On 24 May 2022, the High Court refused a claim brought against the directors of the Universities Superannuation Scheme (the “USS”), the largest private pension scheme in the UK, for inaction around climate change commitments.

Climate change litigation update: Derivative claim dismissed

News / Refund guarantees – avoiding drafting pitfalls

12-05-2022 / Energy & Infrastructure

Refund guarantees are often described as the cornerstones to shipbuilding projects and the buyer’s main security. Although they do not strictly form part of the shipbuilding contract, a shipbuilding project is unlikely to go ahead at all without one. It is therefore important to understand the different types of guarantee instruments, and the impact each has in practice on the guarantor’s obligations to pay and the buyer’s entitlement to recovery. A well-drafted guarantee provides certainty to the parties and strikes a balance between their respective entitlements and obligations.

Refund guarantees – avoiding drafting pitfalls

News / You will be estopped if you cross the line

04-04-2022 / Energy & Infrastructure

Estoppel is a useful tool in litigation, which is usually used to bind one party to a statement or a promise that it has previously expressed causing another to accept or adopt it for the purpose of their legal relations. The Court’s recent ruling in Geoquip Marine Operations AG v (1) Tower Resources Cameroon SA (2) Tower Resources PLC addresses estoppel by convention and recognises the requirement for the common assumption created between the parties to be clear and unequivocal. In this article, we focus on the specifics of the Court decision.

You will be estopped if you cross the line

News / Court of Appeal overturns second Unaoil bribery conviction

29-03-2022 / Energy & Infrastructure

On 24 March 2022, the Court of Appeal overturned the conviction of a second man, Paul Bond, prosecuted by the Serious Fraud Office (SFO) in relation to alleged wrongdoing by Unaoil. 

Court of Appeal overturns second Unaoil bribery conviction

News / The Court grapples with impact of Covid-19 on European rugby

08-03-2022 / Energy & Infrastructure

As we approach the second anniversary of Covid-19 being declared a pandemic by the World Health Organisation on 11 March 2020, a number of judgments are coming out of the English Courts which are providing useful guidance on how the English Courts are treating claims concerning Covid-19, especially in a force majeure context.

The Court grapples with impact of Covid-19 on European rugby

News / Climate change litigation: Courts decide the law, not political policies

02-03-2022 / Energy & Infrastructure

R (Finch) v Surrey County Council CA (Civ Div) [2022] EWCA Civ 187 “The task of the court in a claim such as this is only to decide the issues of law. Those issues cannot extend into the realm of political judgment – which is the responsibility of the executive, not the courts …”

Climate change litigation: Courts decide the law, not political policies