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Publication - Research Publication

Unconventional oil and gas: decommissioning, site restoration and aftercare – obligations and treatment of financial liabilities

Published: 8 Nov 2016

Research into decommissioning, site restoration and aftercare – obligations and treatment of financial liabilities.

137 page PDF

2.6MB

137 page PDF

2.6MB

Contents
Unconventional oil and gas: decommissioning, site restoration and aftercare – obligations and treatment of financial liabilities
Executive Summary

137 page PDF

2.6MB

Executive Summary

Introduction

The Scottish Government commissioned AECOM to produce a study on the decommissioning, restoration and aftercare of unconventional oil and gas ( UOG) developments in Scotland. This study is one of a number commissioned by the Scottish Government with the aim of improving the evidence base for informed decision-making in relation to potential UOG developments in Scotland. The studies follow the publication of the Independent Expert Scientific Panel report on Unconventional Oil and Gas in July 2014 (Independent Scientific Expert Panel, 2014) and the subsequent moratorium on environmental and planning consents for the development of all UOG extraction in Scotland in January 2015.

The broad aims of this research are to:

  • better understand the regulatory measures which are needed to ensure that decommissioning, site restoration and aftercare of UOG developments is undertaken in a way that minimises impacts on communities and the environment; and
  • identify and explore different models of financial guarantee that provide robust security against environmental liabilities and improve understanding of associated costs.

For the purposes of this report, UOG includes shale oil/shale gas developments and the exploitation of coalbed methane. The report highlights any differences between them that are relevant to the aims of the study.

Although this report identifies options for the regulation of and financial guarantees for UOG development in Scotland, it does not make recommendations to the Scottish Government. The direction of future policy or potential changes to the regulatory framework is a decision for Scottish Ministers to take following public consultation on this report and the other evidence based research projects commissioned by the Scottish Government.

This executive summary summarises the key conclusions of the report based on AECOM's assessment and analysis of the available evidence. A summary of the issues, uncertainties and options discussed in the report is set out in Table 1.

Environmental Issues

Sub-Surface Development

Decommissioned oil and gas wells are unlikely to leak gases (including methane) or other fluids from the sub-surface to groundwater or to the atmosphere if constructed and abandoned to comply with international standards and industry best practice. Minimisation of emissions is required to protect human health, ecosystems, groundwater, and surface water quality. Methane is also a greenhouse gas and contributes to man-made climate change. Poorly constructed wells may also allow sub-surface leakage between groundwater bodies such as aquifers, which can affect water quality.

The key to preventing leaks from the sub-surface is ensuring well integrity in both the short and long-term. Experience in the United States, Canada and the UK suggests that long-term well integrity can be achieved by implementing best practice during well construction and abandonment operations under a strong regulatory regime.

However, there is a risk that a small proportion of wells may fail - mainly due to cement shrinkage and that in most cases failure will occur a few years after decommissioning. However, for leakage to occur from a failing well a source of hydrocarbons is required together with a driving force for the gas or oil to migrate. The oil or gas in shales or the gas in coals that are targeted by UOG wells are not under abnormal pressure and there is therefore generally no driving force for leakage. The risk of leakage from abandoned UOG wells is therefore likely to be very low. However, in those UOG wells where there are permeable rocks overlying the target shales or coals that contain hydrocarbons under pressure, there remains a residual risk of leakage if there is a failure of well integrity.

For this reason, it is appropriate to monitor for leakage from decommissioned UOG wells for as long as the regulator, the Scottish Environment Protection Agency ( SEPA) consider necessary. Where leaks are identified, the need for remedial action by the UOG Operator should be based on a risk assessment with remedial action undertaken in accordance with the steps that SEPA consider necessary.

Surface Development

Decommissioning and restoration of surface UOG development may also require the management of leaks from surface installations e.g. tanks and pipework, that could potentially contaminate the ground and potentially affect the quality of groundwater and surface water. The key to preventing surface spillages and leakage is a combination of good design in accordance with pollution control legislation and implementation of an accredited environmental management system. In the event that surface spillages or leakages occur there is appropriate legislation already in place in Scotland to ensure remediation if required following decommissioning and prior to restoration.

Current Regulatory Framework

We consider that Scotland, in common with the rest of the UK, has a framework for the regulation and control of decommissioning and aftercare of UOG development comparable with good regulatory systems in other countries.

The oil and gas licensing system, which is currently operated by the Oil and Gas Authority ( OGA), grants petroleum exploration and development licences ( PEDLs) for the exploration or production of hydrocarbons to operators. The OGA's petroleum licensing powers in Scotland are to be devolved to the Scottish Government in accordance with the Scotland Act 2016.

Operators awarded a licence for UOG development must first demonstrate that they are technically competent, financially capable and that they have appropriate safety management systems in place. As part of the licensing process, operators must demonstrate understanding of the environmental risks (including risks to human health), associated with the full life cycle of UOG exploration, production and decommissioning in their licence area.

The OGA also issues consents to drill. These should only be granted to a licence holder if there is a valid planning permission for UOG development, all the necessary environmental authorisations are in place, there is a system for monitoring conditions and emissions and if the Health and Safety Executive ( HSE) is satisfied with the well design as assessed by an independent, competent well examiner.

SEPA regulates aspects of UOG development through granting of environmental authorisations including risks to the water environment, risk of major accidents, environmental liability and some operational activities. SEPA also regulates the management and disposal of non-extractive waste arising from decommissioning (including naturally occurring radioactive materials).

Well abandonment can only be undertaken if the well abandonment plan is approved by the HSE. Following well abandonment and decommissioning, environmental authorisations can only be surrendered with the agreement of SEPA. Before accepting the surrender of any authorisation, SEPA must be confident that there would be no significant adverse impact on the water environment. This ensures that there will also be no unacceptable impact from surface pollution or from well leakage. Post-operation monitoring by the operator required by SEPA should be of sufficient duration to demonstrate this.

Planning authorities control the restoration and aftercare of surface development at UOG sites through conditions attached to planning permissions. These conditions can include a requirement to remediate any land contamination arising from oil and gas activities. Planning Agreements between the Planning Authority and the operator may also be used to secure financial contributions covering surface restoration and aftercare liabilities.

Lessons on Robust Decommissioning, Restoration and Aftercare

We have examined the lessons that can be drawn from the monitoring and regulatory frameworks for UOG in other countries and of other industries in Scotland.

Regulation of UOG in Other Countries

A review of the monitoring and regulatory frameworks for UOG development has been undertaken for a number of European countries where UOG development is at an early stage (Denmark, Poland and Spain) and for a number of countries outside Europe where there is a mature UOG industry (United States, Canada and Australia).

This review has shown that there is a generally similar approach to regulation in the countries or jurisdictions examined. All require licensing of hydrocarbon exploration and production (including UOG development) and provision of some kind of financial guarantee from operators to manage the environmental liabilities from decommissioning. There is generally either guidance or regulations relating to the design of wells and well abandonment with the objective of minimising risk of well failure and leakage. Ideally, there should be mandatory monitoring throughout the life cycle of a well. In Scotland, baseline monitoring before drilling commences is considered good practice and is likely to be required by SEPA. Operational and post-decommissioning monitoring is required by SEPA.

The robustness of the regulatory regimes in the countries studied varies. The level of financial guarantees required can vary significantly; well construction and abandonment plans do not always require detailed review and approval before being implemented and baseline, operational and post-decommissioning monitoring are not always mandatory. Only a few of the jurisdictions studied have funds for the management of orphaned wells - for which no one has legal responsibility.

Regulation of other Industries in Scotland

The study has also reviewed the regulatory systems relating to landfill sites and opencast coal mining in Scotland to see if there are lessons to be learnt and applied to the betterment of UOG regulation. For both industries, restoration responsibilities are regulated by planning authorities whilst environmental compliance is regulated by SEPA. Where the two industries differ is in the treatment of financial guarantees. In the case of landfill development, SEPA requires that the operator must have made adequate financial provisions to meet its obligations (including aftercare). In the case of opencast coal mining, planning authorities can control the performance, restoration and aftercare of opencast coal sites through financial guarantees attached to legal agreements between the planning authority and the operator.

Restoration Benefits

Restoration can deliver positive benefits for former UOG sites and the wider community. Planning permissions for UOG development normally set out restoration requirements for sites, typically requiring restoration to a site's original land use or to another beneficial use. The proposed community benefits package put forward by UOG operators could also be used to provide wider community benefits. Using the landfill tax credit regime as an example, this could be through land reclamation and restoration, funding of community based projects or groups, maintenance of public parks or other amenity, nature conservation, and the preservation of buildings or archaeological sites.

Lessons for Scotland

Because of the long-history of oil and gas regulation in the UK, both onshore and offshore, Scotland has a mature regulatory system for the decommissioning and aftercare of UOG developments, which is equal to best practice examined in other countries or to regulation of other comparable industries in Scotland. This includes requirements for decommissioning and abandonment of wells, which, with appropriate regulatory oversight and monitoring, are sufficient to manage risks of well leakage consistent with the aim of providing suitable protection for communities and the environment. The devolvement of the OGA's petroleum licensing powers to the Scottish Government provides an opportunity to fine-tune the licensing system to the particular requirements of Scotland. For example, it may be possible to strengthen the powers relating to the provision of financial guarantees by operators that already exist under the petroleum licensing system.

Decommissioning, restoration, and aftercare costs and the treatment of financial liabilities

Whilst Operators are Licensed

It is essential that UOG operators have sufficient funds available to cover liabilities associated with the abandonment and decommissioning of wells. As the licensing authority, the OGA (and the Scottish Government in future under devolved powers) can currently test the financial robustness of operators during licence applications, if a licence changes hands or before a well consent is issued. The licensing authority also has powers to compel the supply of further financial information once operations commence, and to require a company to "take action" if the OGA (or Scottish Government) is not confident that there are sufficient funds to cover its liabilities.

There is potential for improvement in these existing provisions. There is currently no power to require specific arrangements for on-shore well decommissioning and aftercare if a company proves to be failing the financial tests after a well consent is awarded by either the OGA or the future Scottish licensing authority. A relatively simple solution could be for the licensing authority to re-apply the existing financial strength tests regularly for operators and to ensure that the well costs used in the tests include sufficient allowance for the operator's sub-surface decommissioning and restoration liabilities.

If a company fails the financial strength tests, under the existing regulations the future petroleum licensing authority in Scotland would have the power to compel operators to take specific further action. This could include provision of Parent Company Guarantees, insurance, bonds or letters of credit or payment into escrow accounts - depending on the reasons for failing the tests. It is clear that both the liabilities for individual wells and the financial robustness of individual operators will vary. The licensing authority therefore needs to be able to compel specific action to match the individual circumstance.

There is a low risk of post-decommissioning well failure, but should it occur it is most likely to happen within a few years of well abandonment and decommissioning. It could therefore be expected that the licensing authority should only accept surrender of the PEDL when all environmental authorisations and restoration obligations have been satisfied. During this period, the licensing authority could continue to apply the financial tests and require specific financial action should significant liabilities be identified by the regulators.

After Licence Surrender

The likelihood of long-term failure of decommissioned UOG wells, which are well constructed and abandoned, is considered to be low. In the event that a failure does occur after licence surrender, long-term insurance products could cover such risks. Alternatively, a mutual fund could be established to cover the costs of repairing leaking orphaned wells in the future. As an example, an annual levy on consented wells raised through the licence fee on each PEDL could be used for this purpose.

Impact on the Cost of Delivery of Regulation in Scotland

The additional regulatory powers that may be necessary for the future petroleum licensing authority in Scotland are not likely to be significant in the context of the overall economic costs and benefits of UOG development in Scotland.

Table 1: Summary of Issues, Gaps and Options

Key Issue

Uncertainties

Options

Management of Risks

Well Integrity

How can risks of emissions from failed wells be minimised?

Wells, which are designed, constructed and abandoned to a high standard in a strong regulatory environment, are considered to be at low risk of leakage.

Well construction plans approved by an independent well examiner. Regular well inspections by independent well examiner. Well abandonment plans approved by independent well examiner.

Baseline, operation and post decommissioning monitoring with the later continued as long as required by SEPA.

Near Surface contamination

How can risks of surface contamination and shallow groundwater contamination be minimised?

Managed through planning conditions and if necessary Scottish contaminated land regime. Operator's environmental liability insurance.

Surface restoration

How can risks of sites remaining unrestored be minimised?

Restoration conditions in planning permission, enforced and supported by financial provisions through legal agreement.

Regulatory System

Licensing

How does the Scottish petroleum licensing system compare to that other countries or industries?

Comparable to good practice in EU and worldwide. Opportunities to modify and improve under devolved powers particularly in relation to regulation of financial instruments.

Planning System

Is planning system adequate to manage decommissioning particularly restoration?

Planning system robust and able to control surface restoration through planning agreements.

Ability of local authorities to manage financial instruments will be improved if recommendations in Opencast Coal Task Force implemented across those authority areas with UOG development.

Other regulation

Is Scottish regulatory system adequate to manage decommissioning?

The regulatory system in Scotland is reported to be "generally well-coordinated between the main regulatory bodies" (Independent Scientific Expert Panel, 2014).

The Panel has only identified one regulatory gap namely the absence of any mechanism requiring for long-term monitoring and responsibility for wells. However, this report considers that existing post-decommissioning monitoring required by SEPA should be sufficient to identify wells at risk of well integrity failure.

In relation to long-term responsibility, the Expert Panel recognised that "operators have an open-ended liability to remediate any ineffective abandonment".

Management of Financial Liabilities

During licensing

How to manage risk of operators abandoning sites before decommissioned.

How to ensure post-decommissioning liabilities are managed by operators.

Use of appropriate financial instruments to mitigate risks, e.g. bonds.

Post licensing (not orphaned)

How to manage risks post-decommissioning where operator is in existence.

Managed through use of operator's Environmental Impairment insurance.

Post licensing (orphaned)

How to manage risks post-decommissioning where operator is no longer in existence.

Mutual Fund created through licensing system and managed by licensing authority?


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