New rules will force oil and gas exploration companies to release detailed financial information to prove the taxpayer won’t be left holding the baby when it comes to expensive decommissioning of old oil rigs
The Tui oil field, 50km off the Taranaki coast, was once the biggest and most lucrative in the country. In 2008, at the height of production, its five deep-sea wells and floating production and storage vessel, delivered almost 13.5 million barrels of oil.
Over the first nine years, it produced $US3 billion of the black stuff.
And then everything stopped. A little more than a decade after production started, it was finished, the company that then owned it was gone, and the New Zealand taxpayer was left with a $350 million bill for shutting down and cleaning up the drill site.
Last man standing to stop an potential environmental disaster.
Neither Australian Worldwide Exploration, the company that made most of the money out of Tui oil, nor Tamarind Taranaki, which bought the field in 2016, had to pay anything – AWE because it was no longer involved, and Tamarind because it went into liquidation in 2019.
And that’s because despite provisions in the Crown Minerals Act which should have made oil and gas companies responsible for decommissioning their sites, no one checked when Malaysian-owned Tamarind took over that it had enough money to clean up once drilling was finished.
In 2020 the Government swore “never again” and has been working on legislation ever since.
The Crown Minerals (Decommissioning and Other Matters) Amendment Bill, which got Royal Assent in December last year, combined with policy proposals released last week will make it compulsory for oil and gas companies to hold enough money to fund any decommissioning (and if necessary post-decommissioning) work.
Most importantly, they have to prove to the Government they have those funds.
“The Amendment Act introduces: a clear and consistent obligation on petroleum permit and licence holders to decommission; greater monitoring powers; and a requirement on petroleum permit and licence holders to obtain and maintain a financial security for decommissioning,” the regulations, released by Energy and Resources Minister Megan Woods, says.
In practical terms that means oil companies drawing up and costing decommissioning plans, those plans and costings being externally verified, and then “the annual disclosure of financial statements that are prepared in accordance with other enactments and other prescribed information to enable ongoing financial monitoring and… minimum supporting information to enable financial capability assessments.”
A good move, but ‘no panacea’
Environmental campaigners welcomed the new regulations, although they worry that with so much volatility in the oil market, an exploration company’s financial situation could change quickly.
“Maybe I’m too risk averse, but if said to me before April 2020 that the oil price would go negative I would not have believed you,” says David Tong, global industry campaign manager for Oil Change International. It’s the same with the massive recent oil spike caused by Russia’s invasion of Ukraine – who would have predicted it.
“This is a very unstable market, and there are many situations where oil companies can rapidly pivot and the information oil companies provide could change rapidly.
“For example, BP owned 20 percent of [Russian energy company] Rosneft, which provided 30 percent of BP’s production globally. [Before the invasion], no one would ever have expected BP to be writing down such a massive percentage of its business.”
New Zealand companies are impacted by the international oil market, Tong says, and the country’s small size and remote location means a big global company in trouble might see abandoning a local subsidiary as an easy option.
Catherine Cheung, researcher for Climate Justice Taranaki, calls the new regulations “positive steps, but no panacea”.
She says decommissioning oil and gas drilling operations is very complex (as the Government has discovered with its $350 million price tag at Tui) and there’s always the risk an exploration company might not fully remediate its sites.
“For onshore oil and gas wells, there are significant risks on people if the job is not done well. Offshore, decommissioning is out of sight and would require greater scrutiny to avoid disasters on the marine environment and fisheries,” Cheung says.
“It’s good to see the cost of monitoring included in the regulations, but who exactly will be monitoring decommissioned sites when the companies are gone?”
“Incoherent and excessively strict”
The petroleum exploration companies aren’t totally happy either, but for different reasons.
In its submission on the proposed regulations, Energy Resources Aotearoa, formerly the Petroleum Exploration and Production Association of New Zealand, called the reform package “incoherent and excessively strict”.
Energy Resources warned of the huge impact of retrospectively imposing new standards on existing oil exploration and extraction operations without “fairly and justly transitioning permit holders into the new regime”.
The organisation argued the mandatory imposition of financial security requirements proposed by the Government were “unnecessarily prescriptive, especially given the new powers the Minister will obtain to investigate and review the financial capability of permit holders.
“Our strong preference has been that private management of liability is the standard approach and that financial security is only required where there are material issues with the company’s financial position or method of provisioning etc. This would better reflect a risk-based approach.”
Energy Resources chief executive John Carnegie told Newsroom he supported operators taking responsibility and paying the costs for decommissioning but the new rules were “regulatory overkill, going way above and beyond what’s required to protect taxpayers”.
“This is another blow to investment confidence at a time when our energy sector really needs new investment. In recent times we’ve seen blackouts, job losses and high prices for users thanks to an energy shortage and this will only make it worse,” Carnegie says.
At least there’s not a levy
Still, it could be worse for the industry. They could be paying for the Tui debacle. That’s what’s happening in Australia.
In 2021 the Australian Government imposed a levy on the entire offshore oil and gas industry to cover an estimated $A1 billion offshore oil field decommissioning bill.
Much like what happened with Tui in New Zealand, a large Australian oil and gas company, Woodside, sold a floating rig and the oil fields associated with it to a small player in 2016. That company collapsed into administration three years later leaving a potentially $A1 billion clean-up bill. In an article in the Guardian, oil giant Chevron attacked Woodside for landing it with what could be a $A200 million levy payment.
The field had produced billions of dollars worth of petroleum products for one company, but others were left with most of the cost of clean-up.
“Chevron is being asked to pay via the levy a substantial proportion of the decommissioning costs of the LamCor assets, thereby subsidising the failings of the companies that participated in and benefited from the production of that asset,” the company said.