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Sellers bear the brunt of new oil & gas decommissioning rules

Home Insights Sellers bear the brunt of new oil & gas decommissioning rules

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Contributed by: Mei Fern Johnson, Gareth Worthington and Maggie Burns

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Published on: June 28, 2021

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Amendment to the Crown Minerals Act introduced to Parliament 


On 23 June 2021, the Crown Minerals (Decommissioning and Other Matters) Amendment Bill was introduced to Parliament, proposing amendments to protect the Crown and taxpayers from paying for the decommission of petroleum infrastructure.
 
The changes do not apply until the Bill has come into force, but the Government is hoping to have it passed before the end of the year.
 
The key changes in the proposed Bill include:

  • Introducing an express statutory obligation for all current and future petroleum permit and licence holders to carry out decommissioning activities.

  • Holding permit and licence holders liable for meeting the costs of decommissioning even if they have transferred the permit to another party, in the event that the new permit holder fails to carry out decommissioning.

  • Empowering the Minister to carry out more effective monitoring of a permit or licence holder’s financial position (including in relation to financial capability for decommissioning) and plans for field development.

  • Requiring permit and licence holders to hold and maintain financial security in respect of their obligations.

  • Introducing civil pecuniary penalties and criminal penalties for failing to meet such obligations, in particular:

    • In the case of civil pecuniary penalties, a fine not exceeding $500,000 for an individual or $10,000,000 for a body corporate; and

    • In the case of a criminal penalty:

      • if an individual commits an offence, they could be liable for imprisonment for a term not exceeding 2 years or a fine not exceeding $1 million; or

      • for any other case, the greater of a fine not exceeding $10 million or a fine not exceeding 3 times the cost of decommissioning.

 
The Crown Minerals Act 1991 originally took the position that when a permit holder on-sold a permit, the responsibility of paying for the decommission of the site moved with the permit.  
 
Those operating in the industry are cognisant of this issue, including by using a limited liability company as the permit or licence holder, or ensuring no ongoing responsibility for decommissioning post transfer of the permit or licence, thereby in extreme circumstances, privatising the benefits of production, while socialising the costs of decommissioning. 
 
While it is easy to see why the Government is pushing for the law change, it will be interesting to see the extent (some would say overreach) of the final changes.
 
Currently there is no change proposed that would specifically prohibit the directors and shareholders of the original permit or licence holder entity from dissolving / liquidating that entity after transferring the permit or licence. However, the proposed broad new civil and criminal liability measures would cover anyone who:

  • in respect of the pecuniary penalties:

    • attempted to contravene;

    • aided, abetted, counselled, or procured any other person to contravene;

    • induced, or attempted to induce, any other person, whether by threats or promises or otherwise, to contravene;

    • in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or

    • conspired with any other person to contravene,

  • the provisions relating to the decommissioning obligation or provision of financial security; and
  • in respect of the criminal liability, directors of the responsible entity during a period when the responsible entity was liable for its decommissioning obligations.

The criminal liability provision expressly covers directors (including in respect of entities that have been dissolved), while the pecuniary penalties provision is broad enough to potentially cover directors and shareholders of a dissolved company. We expect directors will think hard about their potential liability, before dissolving any entity with decommissioning obligations, particularly given their D&O insurance will cease once that entity is liquidated. Similarly, shareholders may also think twice about their potential pecuniary penalties before passing a resolution to liquidate a liable entity.
 
Holding former permit or licence holders liable for the decommissioning of a field, thus effectively puts them in a double-jeopardy position of having to pay twice for the same liability. When a permit or licence holder seeks to transfer its interest in a permit or licence, a purchaser will only be prepared to pay for the value of the permit or licence interest, net of expected decommissioning liability or a share of that liability. As such, the original holder (that is, the seller) "pays" their share of that liability by accepting the lower purchase price. However, now the seller could be required to pay again if the buyer fails to meet the decommissioning obligation and the Crown requires the seller to do so.
 
This can be expected to cause current permit and licence holders some anxiety, especially if they have any intention to transfer their permit or licence in the future. As the seller, they will have to undertake financial due diligence of potential buyers, not just in relation to the buyer's ability to pay the purchase price for the permit or licence interest, but also in relation to the buyer's continued ability to bear decommissioning costs. This is likely to require some level of financial security, given the potential length of time before decommissioning occurs.
 
Arguably this contingent residual decommissioning liability can be dealt with by requiring the seller to offer up financial security to the NZ Government as part of a condition of transfer of the permit or licence interest. However, while it is possible to estimate the decommissioning costs, that would not necessarily cover the actual costs ultimately. This could result in the additional costs not covered by the then permit or licence holder being recovered from the previous holder.
 
The preferred position remains that New Zealand Petroleum & Minerals (on behalf of the Minister) carries out effective due diligence before approving a permit or licence transfer, obtaining sufficient financial security, stepping up ongoing monitoring of the financial position of the buyer, and requiring top-up of the financial security if required.
 
A copy of the Bill can be found here.
 
Please get in touch with one of our team if you would like to discuss how the changes may impact you and your organisation.


 

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