Oil producers clash over $1b disposal bill
Fraught tensions have surfaced within the oil and gas industry over government proposals for a levy that could force producers to fork out hundreds of millions of dollars for the disposal of an abandoned offshore oil platform that they have nothing to do with.
Heavyweights such as ExxonMobil, Chevron and Shell, some of those set to wear the heaviest costs, are furious and are thought to be lobbying heavily behind the scenes in Canberra to overturn the levy plan. Some players want the liability transferred back onto Woodside Petroleum, the former owner of the Northern Endeavour platform in the Timor Sea.
But Woodside is washing its hands of the crisis and federal Resources Minister Keith Pitt is standing firm, adamant that industry must pick up the burden from taxpayers who have been lumped with the costs since the collapse of Northern Oil and Gas Australia (NOGA), the most recent platform owner.
The levy is the most controversial part of a broader toughening-up of the rules by the federal government on the decommissioning of offshore oil and gas platforms and pipelines. Industry is warning that the new strictures will discourage exploration and chase smaller companies out of the sector, with a potentially devastating impact on the economy and jobs.
But Credit Suisse energy analyst Saul Kavonic says that given the “debacle”, it is no surprise the government has developed tougher policy to ensure it never happens again. He estimates the Northern Endeavour bill could reach as much as $US800 million ($1 billion).
“After a period of more lax regulation insufficient to avoid the NOGA situation, it’s possible the industry will now face a swing in the other direction, with much tougher policy regarding trailing liability and financial assurance that could seriously impact balance sheets and later life asset sales,” Mr Kavonic said.
The tougher rules come as Australia’s offshore industry is facing an estimated bill of more than $50 billion out to 2070 for decommissioning.
Australia is poised for its largest-ever wave of offshore development wells that reach the end of their producing life and need to be taken offline, according to Rystad Energy. The consultancy estimates the number of wells requiring “plugging and abandonment” will jump from 160 today to more than 440 by 2026, with a further 172 exploration wells waiting in the queue.
“Recent developments have made it more difficult for operators to sidestep decommissioning obligations by selling ageing assets, as the market appetite for such assets is drying up,” said Jimmy Zeng, senior upstream analyst at Rystad, which says ExxonMobil, the operator of the Bass Strait gas venture, has the lion’s share of liabilities.
Worries about future liabilities have already derailed recent multibillion-dollar campaigns by Exxon and Italy’s Eni to find buyers for Australian oil and gas assets.
Under the government’s proposals, the regulatory regime will be modified to include a “trailing liability” system which would allow the responsibility for clean-up and disposal to be placed back onto a previous owner as a last resort if a new owner went bankrupt.
It will also introduce extra financial assurance requirements for offshore operators that extend well beyond the existing coverage of events such as an oil spill to include decommissioning.
Well aware of its fragile social licence and mounting climate pressures, the industry is broadly supportive of more robust rules around decommissioning.
But the levy is a step too far.
“Chevron Australia is committed to working with the government on a decommissioning policy framework that would effectively preclude the need for this type of ad hoc, arbitrary action,” said a spokesman for the US firm.
As one of Australia’s largest offshore producers, Chevron stands to bear a greater share of the cost than those who profited from Northern Endeavour.
”We take a proactive and planned approach to decommissioning, and we already fully account for our decommissioning obligations.”
Shell Australia chair Tony Nunan was also blunt in the group’s opposition to a levy, at a conference this week in Sydney.
“We will continue to work with government on the direction that it goes in, but we don’t support the levy,” he said.
”We will work with government on the options, we are engaged in the process, and we will stay engaged in it.“
Beach Energy managing director Matt Kay describes the sector’s predicament as “fairly unpleasant”, admitting it is “not a great reflection for Australian industry in terms of where we have finished”.
“You can imagine the discussion I would have to have at board level and with investors that potentially Beach will have to front up for an asset that it has never been involved in on the other side of the country and has never received any economic rent from,” Mr Kay said.
”So if it’s the right thing to do for the industry going forward, clearly we will be there, but it is a pretty unpleasant place to be.”
Still, Mr Pitt is brushing off industry’s outrage at the levy, adamant that it must step up to cover the costs of Northern Endeavour, and noting that the surcharge was tabled by government only after the industry failed to come up with its own solution.
“I have been very clear with the industry from the time I came into this role that taxpayers will not be bearing the cost of the Northern Endeavour decommissioning,” Mr Pitt told AFR Weekend.
“I gave offshore oil and gas exploration companies ample opportunity to put forward alternative proposals to address the liquidation of the Northern Oil and Gas Company,” he added, promising the government would consult with industry on how the levy will be implemented.
Mr Kay, who like Mr Nunan sits on the board of oil and gas industry association APPEA, said the sector had to pull together to resolve the crisis. But he acknowledged there were “always behind closed-doors conversations”, when quizzed on alternatives under discussion.
Santos has been more direct in signalling its view that Woodside should sort the mess, even arguing for a retrospective change to introduce a trailing liability for past asset sales to avoid damaging the industry’s reputation and losing community support.
“In this case Santos has formed the view that the reputational risk to the industry is greater than the risk of deterring future investment,” CEO Mr Gallagher said in a submission to government.
“Santos considers that the beneficiaries of the fields and assets should be held responsible for any unfunded liability rather than the industry as a whole. The beneficiaries include previous titleholders and the Commonwealth through resource rent receipts.”
But Woodside is shrugging off any responsibility, pointing out that its sale of Northern Endeavour to NOGA in 2016 was fully scrutinised and approved by two industry regulators.
“The regulations at the time of the sale were very clear that there was no trailing liability,” acting CEO Meg O’Neill said this week.
“Government has been pretty clear with us that they don’t intend to do something that goes back on the regulatory or legislative regime that was in place at the time.”
APPEA is urging the government to consider other options to avoid setting a “terrible precedent”, damaging the economy and undermining investment confidence in the offshore industry.
A spokesman pointed to options such as selling the asset, working with creditors, making available Petroleum Resource Rent Tax credits and seeking “in-kind” contributions from industry,
“A levy is not the right instrument,” he said.
Extracted from AFR