July 30, 2019
With proven oil & condensate reserves of 36 billion barrels and at current production levels of 2.1 million barrels per day, Nigeria is expected to deplete its oil reserves in 46 years. The practical reality of the waning trajectory of oil production makes the discourse on decommissioning and abandonment costs germane to the Nigerian oil and gas industry.
Decommissioning, which is the general term for returning an oil production site to its pre-lease condition at the end of the useful life of the oil asset, can be a costly exercise for the companies involved and can also be challenging for the government, in terms of enacting effective regulations to enforce remediation and restoration of the environment.
In some other jurisdictions with more mature oil and gas basins, decommissioning has become a costly challenge requiring direct financial intervention by the government and creation of incentives for operators to continually improve and optimise decommissioning performance. For example, the decommissioning costs for removal of 600 fixed installations and plugging and abandoning of 7,000 wells in the rapidly maturing North Sea basin is estimated at US$150 billion. Regardless of the cost challenges posed by decommissioning of oil and gas installations, various international conventions require coastal states to exercise their sovereign rights on the removal of disused and abandoned installations and facilities within their continental shelf and exclusive economic zone.
The most recent of these international conventions is the 1982 United Nations Convention of the Law of the Sea (UNCLOS III), which came into force in 1995, and prescribed the application of generally accepted international standards on the removal and abandonment of offshore platforms impeding coastal navigation.
In furtherance of the UNCLOS III, the International Maritime Organisation in 1989 issued the Guidelines and Standards for the Removal of Offshore Installations and Structures on the Continental Shelf and Exclusive Economic Zones, as a guide to member-countries on offshore decommissioning. While these international conventions are deemed legally non-binding, they constitute a recommendation for government and operators in the oil and gas industry.
In Nigeria, the Petroleum Act mandates the implementation of an abandonment programme approved by the Director of Petroleum Resources for the decommissioning of any soon-to-be abandoned oil field. The guidelines for the abandonment program and decommissioning of oil and gas facilities is further provided in the Environmental Guidelines and Standards for the Petroleum Industry in Nigeria (EGASPIN) issued by the Department for Petroleum Resources. In this article, we would examine important considerations on decommissioning that should be of concern to the industry and the Nigerian government.
Within the last decade, the Nigerian upstream sector witnessed significant transactions involving the sale of interests in oil licenses. Some of these transactions were concluded in the time of high oil prices and in some instances involved asset transfers from International Oil Companies with long years of carrying on exploration and production activities in Nigeria, to smaller indigenous companies with limited experience in the upstream sector. Expectedly, decommissioning obligations and the potential liabilities are also transferred to the new holder of the license.