Insurers may be wary of insuring decommissioning liabilities in the Middle East region, in the face of uncertainties surrounding the activity, according to three players in the oil and gas field.
Industry players are facing technical, commercial and legal challenges in the region in decommissioning oil-and-gas facilities, which will become more urgent as the installations approach their end of life, said a report titled ‘Decommissioning in the Middle East: Opportunities and Challenges’ by Mr Steve Gilbert, director of asset management & decommissioning at Lloyd’s Register, as well as Ms Ana Severova and Mr Richard Devine, both partners at the UAE-based law firm Devine & Severova.
The writers noted that with a significant number and concentration of older oil-and-gas facilities, decommissioning is becoming a hot topic in the Middle East.
An unavoidable end
Although recent numbers are lacking, it has been estimated that there are around 700 facilities that will need to be decommissioned in the Middle East. In addition, many fields have been more prolific than expected. As a result, a lot of infrastructure still in use has already reached the end of its original design life.
Moreover, oil companies operating in the region are often working under HGGIs (host government granting instruments) with no decommissioning obligations and with no applicable legislative framework. Without provisioning for decommissioning costs, such companies may find themselves with decommissioning liabilities which have not been factored into investment decisions and which they are not able to recover cost from petroleum production.
Decommissioning is the natural end of the life cycle of an oil-and-gas field; it may be delayed, but it cannot be avoided. The need to retire this infrastructure may even accelerate as the region adopts new sources of energy.
Left largely unregulated
While jurisdictions vary, many producing countries in the region do not yet have mature legislative and regulatory structures for decommissioning and older oil-and-gas contracts do not address the issue in detail. This creates the potential for uncertainty regarding the allocation of decommissioning liabilities, the standards applicable to the abandonment of infrastructure and the handling of residual long-term liabilities. Therefore, the extent of companies’ liabilities is unclear.
Bearing in mind the potential severity of civil and criminal sanctions for breach of environmental laws, it is of paramount importance that companies and their partners understand the extent of their responsibility for decommissioning and abandonment liabilities and obligations, the authors said.
While contractors must follow environmental laws and regulations, these are general in nature and do not contain any specific standards applicable to decommissioning of infrastructure, whether onshore or offshore. Accordingly, the only guidance will be provided by applicable international standards.
In order to ensure some certainty where liabilities are difficult to quantify, there are various products and models that have existed for some time in the market. For example, insurance for decommissioning liabilities has been around in the North Sea for some time. Currently such insurance can be taken out for third-party property and liability exposures that the operator will face, including abandonment and environmental pollution. There may be room for this to expand, for example to cover decommissioning warranties and cost overruns, the authors said. M