Corrs High Vis: Episode 56 – Trailing Liability for Asset Decommissioning (Part 1)

Tom Milner – Hi Everyone.

I’m Tom Milner, a lawyer in the Corrs Sydney Project Team and I’m here with Trevor Thomas, a Partner in the Team to talk about trailing liability for asset decommissioning. You can also find our recently published article on this topic on the Corrs website.

This podcast episode will be the first in the series published by Corrs on the topic of legal issues relating to asset decommissioning. So, Trevor, could you please tell us why decommissioning liability is such an important topic right now?

Trevor Thomas – Thanks, Tom.

There are basically two main reasons why there is a major focus on decommissioning. First, there has been limited decommissioning work in Australia to date, meaning that many major assets are reaching the end of their useful life. This includes assets in industries like energy, heavy industry, manufacturing and chemical production factories, aircraft and shipping.

Second, the clean energy transition means that many fossil fuel assets are facing early retirement. For example, AGL recently announced that it’s planning to retire its Loy Yang A Power Station in 2035; ten years earlier than expected.

Between these factors, Australia’s total asset decommissioning liability is estimated to exceed 60 billion dollars between 2020 and 2050. So, there is a huge pipeline of decommissioning work that has to be done by somebody.

Tom Milner – So, I suppose the key question here is, who is required to decommission these assets?

The Australian legislative framework for decommissioning liability is quite piecemeal. There are different standards for different industries and for different states. For example, there is a Commonwealth Offshore Electricity Infrastructure Act which regulates decommissioning of offshore wind assets, and there is a Victorian Water Act which regulates decommissioning of dams.

So, what’s different about this recent federal offshore oil and gas decommissioning legislation and why was there a change in approach?

Trevor Thomas – In Australia, decommissioning liability normally only applies to the assets current titleholder. For example, under New South Wales onshore petroleum legislation, the current titleholder is responsible for the decommissioning onshore petroleum assets. There are no safeguards if the titleholder becomes insolvent, or is unable to decommission the asset.

The dangers of this legislative framework were really highlighted in February 2020 by the collapse of the Northern Oil and Gas Australia Corporate Group. One company in the group Timor Sea Oil and Gas Australia, held a petroleum title in the Timor Sea and also owned and operated a floating production storage and offtake facility. The Group went into liquidation in February 2020 and was unable to decommission the facility and the oil field. The 250 million dollar decommissioning liability instead fell upon the Commonwealth Government, which recover the costs of decommissioning through temporary levy on offshore petroleum. The Federal Parliament recognised that this was not a sustainable approach to addressing the problem of titleholders being potentially unable to decommission their assets.

In September 2021, the Federal Parliament passed the Offshore Petroleum and Greenhouse Gas Storage Amendment Titles Administration and Other Measures Act, which came into force in March 2022. The key distinguishing feature of the Act is that it introduces a trailing liability mechanism for decommissioning offshore oil, gas and carbon capture and storage assets. Trailing liability applies when the current titleholder is unable to meet its decommissioning obligations or where previous decommissioning work is defective.

Tom Milner – Thank you, Trevor.

So, could you expand a bit on what exactly trailing liability means in the context of this new legislation?

Trevor Thomas – The trailing liability mechanism allows the National Offshore Petroleum Authority to issue remedial directions extending decommissioning liability to a party other than the current titleholder. This will only happen when the current titleholder can’t decommission the asset, or when previously completed decommissioning work is defective.

The Authority can issue a remedial direction to former titleholders and their related bodies corporate, as well as to any other person who has, or could have, significantly benefited from the operation of the asset, who has been in a position to influence the extent of another person’s compliance with the Act, or, who has acted jointly with a titleholder in operating the relevant asset. Now, this is a very broad scope of potentially liability parties. It might include, for example, joint venture partners, secured lenders, and royalty holders. That is a big departure from the normal approach of only imposing decommissioning liability on the current titleholder.

Tom Milner – So, it’s fair to say that this trailing liability mechanism is definitely unusual, particularly in the Australian context. But, is it unprecedented? Or, do we have something similar to this either already in Australia or in an overseas jurisdiction?

Trevor Thomas – It is unusual in Australia, but it is not unprecedented, and it’s a much more common approach internationally. For example, Norway, the UK and the US where much more offshore decommissioning work has already been done already have similar regimes.

In Queensland, since 2016 the government has been able to issue environmental protection orders to any related person of the titleholder for any type of asset where remediation is required. Related persons include related bodies corporate, landowners, and any other person who could have significantly benefited from the use of the asset.

There is also more trailing liability legislation potentially on the way in Australia. The Northern Territory Government has proposed a draft Trailing Liability Bill for onshore petroleum assets, while the Victorian Government intends to introduce trailing liability for coal mining decommissioning.

Considering the size of the Australian decommissioning pipeline, it seems unlikely that trailing liability for decommissioning will remain confined to particular sectors or jurisdictions for much longer.

Tom Milner – What type of companies should really be thinking about this trailing liability legislation, and are there any steps that you could recommend that they should take to address risks that the legislation might create for them?

Trevor Thomas – One, any company or government body that owns or operates, or is thinking of buying, selling or leasing any major asset. Two, any secured lender financing the construction or purchase of a major asset, and three, any joint venture partner or related body corporate of that titleholder. All of these companies need to be thinking about the potential decommissioning liability exposure and structuring their transactions accordingly. That might mean putting in place risk mitigation measures like security arrangements, indemnities in favour of prior asset holders and cross guarantees.

This risk exposure could also have an effect on the commercial value of assets, which are close to the end of their life, and this will also become an increasingly important consideration for parties dealing with these assets.

Tom Milner – Thank you, Trevor, for those insights into potential impacts of trailing liability for asset decommissioning in Australia.

If any listeners have any questions about this area, or would like to discuss how decommissioning liability could affect your company, please reach out to either of us or a member of the Corrs Team.

Thank you for listening.