Ben Moon Legal Director
Reallocation of risk and reward to drive down contractor prices? The OGA's new Decommissioning Strategy
If decommissioning on the UK Continental Shelf (UKCS) forms part of your business, you need to pay attention to the new UK Decommissioning Strategy from the Oil & Gas Authority (OGA). Change is coming.
In the words of the OGA:
“This market will require a set of radically different business models, relative to the existing investment models. These models will be developed to reduce cost significantly through appropriate allocation of risks and liabilities, and alignment through a balance of risk and reward.”
And with that, the OGA took aim at the supply chain side of decommissioning, indicating its plans to shake things up, re-assess the allocation of risk and reward between the protagonists and “drive down costs”.
In our last bulletin we reported on significant changes to the UK energy industry following the introduction of the Energy Act 2016 and MER UK. On 30 June 2016, the OGA published its Decommissioning Strategy which makes no secret of its aim to slash the anticipated spend on decommissioning.
The OGA has put industry transformation at the heart of its strategy to improve efficiency, with the primary aim an ambitious KPI of reducing estimated decommissioning costs from £47 billion by 2050 to about £30 billion over the same period.
The Decommissioning Strategy has identified three priorities to achieve this:
1. Cost certainty and reduction;
2. Decommissioning delivery capability;
3. Decommissioning scope, guidance and stakeholder engagement.
Of most interest, perhaps, so far as legal impact and potential exposure to contractors is concerned, are the OGA’s plans regarding how business will be done and the underlying contracting strategy.
Indeed, the interest currently arises out of the intrigue over what this will be. The MER UK Decommissioning Board’s intention to develop and publish within this year a “transformative business model, including potential liability allocations and risk and reward schemes, designed to reduce costs by at least 20%” is, perhaps nervously, still awaited, as is its proposed guidance on “contractual and commercial positions”. It may be that some of this will be revealed at the OGA’s “MER UK in Practice” event taking place in Aberdeen on 25 October 2016.
That further guidance may well lead to new, standardised forms of contract for decommissioning work, with all of the care that engenders for drafting the risk allocation provisions they will contain, such as indemnity schemes, consequential loss exclusions, pollution liabilities, etc. It is also likely to lead to a careful review of company insurance programmes and ensuring that there are no gaps between the risk in the work, the liabilities arising out of the contract(s) and the protection bought from underwriters. Where gaps do appear, new solutions may need to be found.
The OGA's plans also include:
> Driving targeted cost efficiency programmes;
> Increased collaboration and effective knowledge sharing within the decommissioning market to develop demand-led technology;
> Tackling the integrated nature of offshore installations; and
> Industry alignment.
As if all of this is not enough, the contracting industry will, of course, also be expected to adapt to whatever this new approach may be without compromising the need to maintain (if not improve) safety and ensure that decommissioning is executed in an environmentally sound manner.
At the time of going to press, the OGA has just published its Decommissioning Delivery Programme which gives some more detail on how the core priorities of the Decommissioning Strategy will be delivered. The immediate highlight is that the OGA plans to carry out industry consultations on business models during the latter part of 2016, with a view to publishing business model recommendations by the end of 2016 before embarking on pilot schemes of new business models in 2017.
There are clearly challenges ahead. We shall comment on these developments in future bulletins as and when they occur.
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