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close this bookThe Courier N 130 Nov - Dec 1991 - Dossier: Oil - Reports: Kenya - The Comoros (EC Courier, 1991, 96 p.)
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Redundant oil figs - what to do when the oil runs out

by Dr Peter CAMERON

The rewards of successful oil and gas exploration are so well known that the high costs associated with abandonment of the production installations when no longer required may come as an unpleasant surprise to most governments. For many years, no provision was made for this in the agreements reached between governments and the international oil companies. In the 1990s, the first generation of fields developed under production-sharing contracts - the innovative contract of the 1960s and 1970s - will in many cases reach the end of their field life. How will governments and their national oil companies respond to this challenge? The growing concern over environmental issues generally means that the challenge cannot simply be ignored.

In this article, I shall be particularly concerned with the legal issues involved, rather than those of a technical or economic character. At the international level, there has been much discussion of the legal issues within the framework of the United Nations Law of the Sea Convention. Ultimately, however, it is the question of what sort of legal framework developing countries should themselves draw up which will require the greatest attention. Such a framework will have to maintain a healthy investment climate and at the same time, fulfil the government’s obligations to protect the environment, both on- and offshore.

International law

For both host governments and international corporations, it is important to know whether there is a legal obligation to remove and dispose of a petroleum installation, and to know whether the removal is to be total or partial in character. The latter point concerns the discretionary element left to the state under international law.

There are three principal sources of international law on these issues. Firstly, there is the United Nations Convention on the Continental Shelf adopted at Geneva in 1958. Article 5 states that ‘installations which are abandoned or disused must be entirely removed’. Every state with structures located in its waters is affected by the Convention’s requirement. With the benefit of hindsight, it is clear that this provision could well impose a heavy burden on states. For the developing countries; however, the Convention does not provide the only answer to the question. It was drawn up at a time when colonialism was still the norm in international relations and had virtually no input from the developing countries. It was also drawn up when there was scarcely any role played by offshore exploration in the international oil industry.

The second source of law is the United Nations Law of the Sea Convention 1982. Article 80 states that ‘any installation or structures which art abandoned or disused shall be removed to ensure safety of navigation... Such removal shall also have due regard to fishing, the protection of the marine environment and the rights and duties of other States’. The Convention has not been ratified by the required number of states to enter into force, but it is seen by many as having the status of authority in the emerging international customary law, not least because developing countries have had extensive involvement in drafting the Convention. For example, Indonesia played an important role in developing the archipelago concept in the document.

The importance of the Convention’s provision is that it gives states some room for manoeuvre in implementing the requirement to abandon installations. Moreover, It refers to the need for elaboration of its general statements by the competent international organisation. In this case, that body is the International Maritime Organisation (IMO). In October 1989, it produced a set of Guidelines and Standards for the Removal of Installations and Structures on the Continental Shelf and in the Exclusive Economic Zone. These provide an indication of when partial removal may take place. They leave considerable discretion to the coastal states to leave a structure wholly or partly in place, particularly with respect to technical feasibility, possible extreme costs or unacceptable risks both to personnel and environment. If the structure were to be left in place, or relocated to serve a new use such as enhancement of fishing, say by artificial reef creation, this would also be acceptable, so long as the structure were located away from customary traffic lanes.

The two principal concerns were that removal should not lead to pollution of the marine environment and that the area left unavailable to fishing interests (for bottom trawling) should be small. From a legal point of view it is interesting to note that the coastal state is required to ensure that legal title to partially removed installations and structures is unambiguous and that the financial ability to assume liability for future damages is clearly established. Most oil companies will be keen to ensure that, on abandonment, the risk of residual legal liability is limited, to: protect themselves against futures claims for damages caused by the presence of residues of installations or pipelines.

It should not be forgotten that the IMO Guidelines are primarily concerned with safety of navigation. They have little to say, therefore, on the subject of the environment.

Finally, there is the Convention on the Prevention of Marine Pollution by Dumping of Wastes and other Matter of 1972. This declares that dumping requires express prior approval of the coastal state. Other regional conventions are also applicable. So far, there are no separate international guidelines on disposal.

National solution

Where offshore waters are concerned, the international rules governing the law of the sea apply to the continental shelf and exclusive economic zone. On land and in territorial waters, the state has a far greater degree of discretion. However, where petroleum legislation and agreements lack provision for abandonment the government may face some large costs, as a number are now recognising.

At a United Nations seminar on this topic, held in 1989 in Bangkok, it became clear that very few states in the Asian region had more than very general provisions in their legal frameworks. Thailand was an exception, with fiscal provisions to transfer the sole burden of costs to the foreign oil company, which is also allowed to write-off costs until production ceases. The company therefore has an interest in making provision for abandonment while the field is still producing. Several other countries such as Malaysia, Indonesia and Brunei had these matters under review.

On the assumption that governments in the Asian region are unlikely to be exceptional, one may ask: what action should be taken by the developing countries? For future agreements with foreign companies, it will be important to have clauses on this matter limiting the state’s responsibility. They should certainly refer to the IMO guidelines where offshore waters beyond the territorial seas are involved.

Legislation might also be made. For governments, such changes will have to be balanced against the need to attract foreign investment. For companies, there will be pressure to keep such costs as low as possible and also to have safeguards against liability for damage occurring after abandonment. One idea is that an abandonment or reclamation certificate would be a defence against future claims by governments and private parties such as fishermen. A compensation fund would be useful. Another idea is to use environmental impact assessment before field development commences. This would predict the requirements for successful abandonment and the design of structures to facilitate abandonment.

The issue is now on the agenda of those governments in countries which are developing or planning to develop their oil and gas resources. It presents their lawyers and policy-makers with a real challenge.