Guyana should be wary of decommissioning clause in new oil law – MP Patterson

Aug 16, 2023 ExxonMobil, News, Oil & Gas

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…cites what Exxon, Shell did in U.S.

Kaieteur News – Shadow Oil and Gas Minister and Opposition Member of Parliament (MP), David Patterson last week stated that the decommissioning clause in the Petroleum Activities Bill of 2023 spells danger for Guyana.

Decommissioning is the process of ending offshore oil and gas operations at an offshore platform and returning the ocean and seafloor to its pre-lease condition.

The Bill was passed in the National Assembly last Thursday. It was tabled by Minister of Natural Resources, Vickram Bharrat and once enacted will replace the 1986 Petroleum (Exploration and Production) Act Cap. 65:04 and the Petroleum (Production) Act Cap 65:05.

Minister Bharrat during his presentation on the Bill highlighted that Government made provisions in the Bill for decommissioning. He said, “To ensure that the operators bear the responsibility of the decommissioning process, this Bill will set up a decommissioning fund.”

The law states, “The holder of a petroleum production licence shall establish an abandonment fund for the purpose of ensuring adequate funding to implement decommissioning and abandonment operations upon cessation of production and the subsequent expiry of the production licence… The annual contribution to the abandonment fund must ensure that the full estimated cost of abandonment is paid to the fund two years prior to the anticipated commencement of decommissioning and abandonment operations in the production licence area.”

During his objection to some clauses of the Bill, Patterson said that allowing the oil companies to only submit money two years prior to the decommissioning process can leave a burden on taxpayers.

Patterson said that Guyana should be wary of what occurred in other countries, dealing with oil and gas companies when it comes to decommissioning. As such, he noted that while the Opposition supports the decommissioning fund, they asked for it to be placed in escrow.

He cited what occurred in California, United States with American oil giant; ExxonMobil and British oil giant Shell.

“In California and other places in America, they are having issues with a decommissioning plan because what normally happens, what can happen in the industry is that an operator towards the end of a field they normally farm-out the well. So what they normally do they farm it out to smaller operator,” Patterson said.

He explained that towards the end of the project life, when the oil has been depleted – the wells are no longer beneficial to big operators like Exxon. As such he said, in some cases, they can sell their shares in the oil block to small operators – in the process, transferring the responsibility for decommissioning to small operators.

Due to the high price tag associated with decommissioning, if a small operator is unable to foot the decommissioning cost, taxpayers can be left with that cost.

“So, there are issues on the decommissioning fund, so we saying that it should be put in escrow. So therefore, even if they farm it out, that money is there all the time,” MP Patterson added.

Kaieteur News had reported that last September when Exxon and Shell announced they will be selling their California wells; U.S. officials raised concerns that the reason behind the oil companies’ departures is the looming liability for environmental clean-up – which can be left on U.S. taxpayers to foot the bill.

ProPublica, a non-profit newsroom that investigates abuses of power particularly in the oil and gas industry – reported that despite the price of oil produced in California, this year it has reached its highest level in a decade – Exxon and Shell who have done business in the State for more than a century, are selling assets and beginning to pull out of California.

ProPublica also reported that the oil giants agreed to sell more than 23,000 wells in California, which they owned through a joint venture called Aera Energy, to German asset management group, IKAV, for an estimated US$4 billion.

While Exxon and Shell say the deal will strengthen their businesses – Greg Rogers, an Attorney and Accountant who researches the oil and gas industry, said the deal allows the sellers to shed decommissioning costs. “You got bad assets with big liabilities, and you can get rid of both at the same time. That’s a win for Exxon and Shell,” he said.

Other industry experts, lawmakers and environmentalists are concerned about the deals, noting that the sales shift environmental liability from corporate powerhouses to less-capitalized firms, increasing the risk that aging wells will be left orphaned, unplugged and leaking oil, brine and climate-warming methane. They see a threat that the State’s oil industry could repeat a pattern seen in other extractive industries like coal mining and lead to taxpayers bearing clean-up costs.

California Assembly Member, Steve Bennett, a Democrat who has long worked on oil policy, has seen oil companies in his Ventura district walk away from environmental liability. “It gets passed on to a smaller company and to a smaller company until someone declares bankruptcy and the public is stuck with the clean-up bill,” he said.

According to ProPublica, if it’s not profitable to return wells to production, they need to be plugged. But if a company does not plug its wells before walking away, wells are orphaned and the clean-up costs ultimately fall to taxpayers and current operators through fees.

It was stated that in order to minimize the Government’s exposure if wells are orphaned, producers must put up a bond, typically held as cash or a surety policy. The bonds act like a security deposit in which the company gets its bond back if it cleans up its mess, but the Government keeps the money if the company orphans its wells.

While California has the authority to ask for an additional US$30 million in financial security from a single operator – Shell and Exxon’s joint venture holds a US$3 million bond. As a result, Aera’s bonds cover way less than what would be required to plug the wells.

According to ProPublica, California is unique because State law allows regulators to call on former operators such as Shell and ExxonMobil to help pay for plugging onshore oil wells if they are later orphaned, even by a different owner. But companies have escaped responsibility under this stronger legal standard, by exploiting loopholes such as a porous bankruptcy code.

Some experts question whether Shell and ExxonMobil would be required to pay if the wells they are selling to IKAV are ultimately orphaned, saying their ownership of the wells through a separate company, Aera, might shield them from liability.

Additionally, Exxon’s affiliate, Esso Exploration and Production Guyana Limited (EEPGL) has been taking out money from Guyana’s oil production for decommissioning – this money is being controlled by the company.

During an engagement with media operatives in June 2022, ExxonMobil Guyana acknowledged that decommissioning funds are not needed until 20 to 30 years down the line. Be that as it may, the company noted that the provisions of the 2016 Stabroek Block deal allow for early recovery.

The oil giant assured nonetheless that when Guyana needs that money for clean-up, the money will be handed over.

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• David Patterso, Member of Parliament (MP), opposition, Shadow Oil and Gas Minister, Vickram Bharrat

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