As Benjamin Franklin famously said, the only certainties in life are death and taxes. And the same applies to an asset - from exploration to discovery; from discovery to development; and from development to production.
Each stage comes with costs, coupled with the inevitable decline of production and the terminal event of decommissioning.
So what happens at the end stage - when production ends and decommissioning begins? How are costs covered? And, if one of the costs is paying the contractor, how does the contractor have any comfort that payment will be made?
If a licensee continues to produce from other assets, its credit rating and liquidity may be considered less of an issue.
However, where a licensee has limited production, particularly in the current market, care should be taken and a contractor should consider how it will be paid for services.
In most cases licensees will have prepared for decommissioning by making trust arrangements during the life of a field that are dedicated to pay for decommissioning costs.
So where's the snag?
Well, there can be a few depending on how much money is in the trust, whether this is sufficient, and whether the funds can be accessed in the event that a licensee doesn't pay.
Where there is a concern regarding payment, a contractor may want to consider, in the appropriate circumstances, asking the following questions:
- Is there a decommissioning security agreement in place? If so, does it follow an industry model and who are the current parties?
- Who are the current Second Tier Participants (parties that will be obliged to carry out the decommissioning under the Petroleum Act should the current licensees fail to decommission)?
- Are there any other beneficiaries to the trust?
- What sum is currently in the trust and in what form: cash, PCG, letter of credit or bond?
- How, and by whom, is the trust managed to ensure that invoices are paid?
By understanding and asking these questions, and others, contractors will be able to make the most of tender opportunities. To maximise these opportunities though, contractors would be wise to start familiarising themselves with decommissioning arrangements now.
Most licensees may have other assets at the moment but the current market and the increased threat of early decommissioning may result in the untimely demise of some of these and added pressure on licensees. Therefore a clear understanding of how to protect payment is paramount.
Contributors
Partner
Consultant
