Companies must bear oil & gas rig retirement cost

Published on Thu 5 August 2021 12:35pm

The next time that we hear anyone—someone in the current government or in the corporate world—banging on about the need to remove red tape at all costs, perhaps we should stop and think about why proper regulation is absolutely necessary and what happens when it doesn’t exist.

Mr Wilson (12:35pm) – [by video link] I’m glad for the opportunity to speak in support of the Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Bill 2021 and particularly in support of the second reading amendment moved by the member for Brand, the shadow minister for resources, and I endorse the contribution that she made earlier in this debate.

The bill addresses some serious regulatory blind spots in the way we manage oil and gas infrastructure, especially in relation to the way such infrastructure is properly and responsibly decommissioned and also the way we ensure that such infrastructure doesn’t come to be sold off towards the end of its operational life, when safety and maintenance issues become more acute, to a company that has insufficient experience and capability to manage those risks to our marine environment and our ocean biodiversity. Unfortunately, the blind spots in question are not being caught in advance of serious regulatory failures. They are being caught because very serious and costly failure has already occurred in the form of the Northern Endeavour fiasco, through which the disposal of an asset by Woodside has resulted in a bill to the Australian taxpayer of $230 million, and rising. I’ll talk a bit more about that in a minute.

I do want to acknowledge at the outset of my contribution that the changes contained in this bill are, broadly speaking, sensible and welcome. The minister and his department have taken heed of the Walker review into the Northern Endeavour fiasco. They have not been swayed by some reflex opposition from industry, and they’ve brought forward what appear to be some meaningful and well-designed reforms. At a time when people need to have faith in our system of governance they should be able to see that politics and parliament not just accommodate but actually look for collaborative and constructive approaches to problem solving. There are plenty of areas in which I have made and will continue to make strenuous criticism of the Morrison government, but the reforms being made here, especially the application of a trailing liability, are a step in the right direction. There’s quite a lot more to be done, and I’ve written to the Minister for Resources and Water and the Minister for the Environment separately on some of those outstanding issues, in my role as shadow assistant minister for the environment. But this is a good start.

To go back to the beginning: Australia has a long established and large oil and gas sector which involves dozens of offshore operations with related infrastructure of platforms pipelines that sit within our precious marine environment. When all goes well, those projects form a key part of our current energy industry, and that sustains very significant economic activity, jobs and exports from which we benefit as a nation. If things go badly—which has been extremely rare in Australia—it puts lives at risk, and it presents an enormous hazard to the marine and coastal environment. When offshore oil and gas projects are approved, there is always a requirement that the company that owns and operates the offshore asset will properly decommission the infrastructure at the end of its life. And, as the shadow minister for resources made clear, the presumption is that the infrastructure will be safely removed in its entirety as much as possible.

We’re now at the stage where a lot of that activity is falling due. It’s estimated that $50 billion worth of decommissioning work will be required in the next few decades, with more than half of that work to commence in the next 10 years. That’s according to analysis from the recently established oil and gas industry group called Centre of Decommissioning Australia.

The regulation and oversight with respect to who owns our oil and gas assets is the domain of NOPTA, the titles administrator. Regulation and oversight with respect to the ongoing proper and safe operation of the assets, and the approval of decommissioning activity, is the province of NOPSEMA. One of the things that we would expect, and which is absolutely right for the Australian community to expect, is that a company that owns, operates and has profited from a piece of offshore kit will be responsible, come hell or high water, for its safe decommissioning. One of the glaring problems in our system to date, unfortunately, has been the ability of companies to dispose of assets in a manner that does not trigger or require an assessment and approval from NOPTA with respect to the capability of a new owner to operate and decommission offshore infrastructure safely.

To understand what can happen in the absence of such a requirement we only need to consider the Northern Endeavour fiasco. Woodside operated the Northern Endeavour offshore oil platform, situated about 500 kilometres from Darwin, for a number of years. In 2015 it decided to dispose of the asset, which occurred in 2016. It’s really hard to describe the disposal as an effective sale in the way that ordinary people would understand a sale, because Woodside actually paid NOGA $20 million to take the asset off their hands. By getting rid of the Northern Endeavour Woodside saved itself what is estimated to be the decommissioning cost of something like $130 million, and that appears to have been a very conservative estimate. NOGA had no experience or background in running offshore oil and gas operations so, not surprisingly, it ran into serious problems from the very beginning. NOPSEMA issued a series of breach notices and took other action in relation to safety, maintenance and other failures within a few weeks of NOGA taking over the asset. The Northern Endeavour was found to be riddled with rust, lacking a proper fire suppression system and at risk of a major accident event occurring.

In 2019, NOPSEMA issued a notice for the Northern Endeavour to cease operations. In early 2020 NOGA went into liquidation. By March of this year, the value of contracts issued by the Australian government to maintain the facility in lighthouse mode and to prepare for decommissioning amounted to $231 million—and I note that the EOI process in relation to the decommissioning itself closed last week, on 29 July. Ridiculously, in my view, that includes $8 million paid to Woodside for their provision of expert advice in relation to the Northern Endeavour. In other words, $8 million of taxpayers’ money is going to Woodside for their advice on how to clean up the mess created by their ill-judged disposal of that asset.

This quote is from an article by industry commentator, Peter Milne:

The responsibility for the ageing and corroded vessel moved from one of Australia’s largest companies to an inexperienced, single-owner, single-director, single-asset undercapitalised company with no input from the regulator.

Three days after NOGA gained the title in 2016 it was already in trouble with offshore safety regulator

NOPSEMA for being ill-prepared for an oil spill. NOGA, as title holder, subcontracted the operating

responsibility to Upstream Production Solutions. UPS was ‘unable to convince’ NOPSEMA that it was managing the “extensive corrosion present on the facility” when the regulator first inspected the vessel under its new ownership.

And yet Woodside’s new CEO has said:

The sale to NOGA was done with full expectation that that player will be able to generate enough revenue to cover the decommissioning obligations.

Taking the summary from the Peter Milne article that I just read, we do have to wonder what the basis of such a flawed expectation could possibly be. In any case, we might think that our regulatory system would have been geared towards preventing the disposal of such an asset from a big profitable company to a tiny and, clearly, incapable company. We might even think that Woodside, as a responsible corporate citizen, would have undertaken its disposal process with something much closer to due diligence than what occurred. It’s genuinely hard to understand how it came to this.

But it came to this because without a rigorous and effective regulatory system there’s no doubt that companies will make decisions that are guided principally by their own bottom lines. When risks, or serious harm or enormous costs result they will fall on all of us. They will fall on our environment and on the public purse. The next time that we hear anyone—someone in the current government or in the corporate world—banging on about the need to remove red tape at all costs, perhaps we should stop and think about why proper regulation is absolutely necessary and what happens when it doesn’t exist.

This is a bill from a coalition government that introduces some additional red tape, the absence of which puts our marine environment at risk of a serious oil spill, the absence of which has already cost the taxpayer $230 million.

As I’ve said, it’s welcome that these reforms will address some of the glaring regulatory gaps, specifically there are changes that address the way an offshore asset can move from one titleholder to another. There are changes that seek to improve the information gathering powers and decision-making criteria that should be at the foundation of a due diligence process with respect to determining whether a company can be trusted to take ownership, but, of course, the most important change is the introduction of a trailing liability, which allows the government to call back a previous owner to undertake decommissioning work where a subsequent owner proves incapable of doing so. That change is eminently sensible. Clearly it is necessary. It was recommended as part of the Walker review and would strike any reasonable person as the kind of thing that should have been there from the very beginning.

Not long ago in the process that led us to this bill, the industry was protesting loudly about the prospect of a trailing liability. That was daft. I’m glad the representative peak bodies have since changed that view. Companies that make very substantial profits from resources that, from the outset, belong to all Australians and that do so having promised to clean up after themselves should not complain in any circumstance about being held to that promise and that obligation. The company seeks to dispose of an end-of-life asset, it should only do so with 100 per cent confidence that the new owner will keep that same promise to the Australian people. This trailing liability, if it works as the government intends, will ensure that’s the case, or else it will require the original owner to make good on the promise themselves. Nothing could be fairer than that.

While these changes are an important step in the right direction, there is more work to be done. The Northern Endeavour fiasco should lead to an audit of existing offshore oil and gas infrastructure to make sure current environment plans are up to date based on rigorous assessments of what’s required, when it’s likely to occur and what it will cost. There also needs to be sufficient transparency and reassurance about the provision that companies have made to meet their decommissioning obligations. The greatest risk is the disposal of an asset from a large and capable company to a small incapable company, but we do need to watch closely that even large companies retain the funds necessary to properly decommission their infrastructure. In relation to both these issues, I note that, as far as I’m aware, neither NOPTA nor NOPSEMA have been provided with additional resources by government. I question whether that’s sensible given the work that’s going to be required. I make the point here that, where the original operator remains in a position to undertake their decommissioning responsibilities, we need to be wary of companies that might seek to do so in a manner that focuses on avoiding costs rather than meeting their agreed obligations to the Australian community and the Australian environment.

I note that earlier this year, Woodside sought permission from NOPSEMA to alter its decommissioning obligation with respect to the Nganhurra riser turret mooring, located off the WA coast. As a result of poor maintenance and a failure to undertake proper inspections, there’s currently an inability to deal with some aspect of the ballast arrangements with that bit of infrastructure, so, according to Woodside, it needs to be sunk. NOPSEMA didn’t agree with that initially, which is not surprising when you consider that the infrastructure contains 6½ tonnes of polyurethane foam and is proposed to be sunk two kilometres from the Ningaloo world heritage area. NOPSEMA has grudging and belatedly approved the proposal, but it can only go ahead under the sea dumping act, which is the responsibility of the Minister for the Environment. I’ve written to the minister in my role as a shadow assistant minister asking for a briefing on that process. I wrote back in April and I’m sorry to say I still haven’t had a response. In any case, this is another example of the difficult and environmentally sensitive issues that will keep rising in the years ahead.

In conclusion, this bill is welcome because it fixes a gap that should never have existed in the first place. It creates, quite rightly, a trailing liability to ensure that operators of offshore oil and gas infrastructure remain on the hook for meeting their obligations when it comes to properly decommissioning their infrastructure, for meeting the promises that they made when they set off to develop and benefit from oil and gas resources that ultimately belong to all Australians. Sadly, it has taken a $230 million, and rising, fiasco to bring us to this point. We should take from this bitter lesson a sharp imperative to apply much greater scrutiny and rigour to this critical area of oversight and regulation, or else it’s quite likely there will be further outrageous costs landed on the Australian taxpayer in the future, not to mention quite serious risks to our marine environment.

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