By Kiana Wilburg
Decommissioning is considered one of the most crucial aspects of an oil project. It involves safe well plugging, platform removals, pipeline and power cable extractions as well as secure site clearance.
All of this takes place when a project is nearing its end. It is an expensive process that runs into billions of dollars.
But if it is not managed properly, and the right contractual provisions and policies are not in place, countries could be left to stand this cost.
As a safeguard against this, oil producing nations have moved in the direction of establishing funds to which the oil company or operator makes payments. When the time for decommissioning or abandonment comes, the countries use that Fund to handle the associated expenses.
In the case of Liberia, the country ensured that ExxonMobil signed onto such an agreement.
In fact, a 2013 Production Sharing Agreement (PSA) it has with Exxon expressly states that when each oil field has reached 50% of its productive capacity, which, for the sake of clarity means that 50% of the estimated recoverable Petroleum has been produced from such Field, the Contractor shall submit a revised Abandonment or Decommissioning Plan along with a budget for same to be approved by the government.
Within 90 days of said approval, an Abandonment Fund would be established. It is held in an interest-bearing escrow account with an escrow agent approved by Liberia’s Ministry of Finance. The PSA states, too, that the account shall be established at an international bank of good financial standing.
The same Abandonment Fund, the PSA notes, shall receive the funds for all fields. Importantly, the PSA states that any portion of the Abandonment Fund not required for or used, the Plan shall be transferred to benefit the State. If Liberia finds that the Abandonment Fund is insufficient to complete the approved Abandonment Plan, Exxon is also required to pay all additional costs needed.
In Guyana’s case, however, the PSA signed with Exxon for the Stabroek Block makes no provision for such a Fund, much less the foregoing provisions.
What is in place, however, is a provision that greatly benefits Exxon. In the PSA it has with Guyana, the American oil king is allowed to tabulate a budget for abandonment, and recover a portion of that budget in the form of oil years before it is time for decommissioning.
During an exclusive interview with Kaieteur News, University of Houston Instructor, Tom Mitro, had said that best practice dictates that while some cost recovery for abandonment is important to establish, this only happens after the company starts pre-funding into some sort of escrow account.
“This provision of allowing them to begin cost recovery, in some cases, 20-30 years before they actually fund the costs, is a very significant benefit for the companies from a cash flow and net present value standpoint… It is not the norm. It is the most unusual provision I have ever seen in a PSA,” Mitro had stated.
The University Instructor had further noted that Guyana is in danger since the company may end up selling its equity interest prior to the time of decommissioning/abandonment. If that were to happen, Mitro noted that the way Guyana’s PSA is set up, Exxon and its partners would have fully recovered all the costs associated with that activity.
In short, only Guyana stands to lose in this type of arrangement, he said. He further stated that this should be corrected in Guyana’s model PSA, which is being prepared by the Department of Energy.
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