Clifford Chance
Decommissioning disputes: how to mitigate risks as we transition to renewable energy
Decommissioning of ageing fossil fuel assets is on the rise globally. It is an important part of energy transition, but is often a complex, costly, and risky business, especially in the offshore sector, with a high potential for disputes. This blog examines some of the risks associated with decommissioning and provides guidance on mitigating those risks.
Decommissioning risks and challenges
As the world transitions to renewable forms of energy, the attention of energy operators, markets and regulators alike has turned to the challenges and opportunities created by decommissioning of ageing fossil fuel assets.
Effectively and sustainably decommissioning of such assets is a significant and complex undertaking that is often hazardous, especially so in the offshore sector. Each decommissioning project is unique, due to the age, condition, location, and nature of the asset in question and each stage of the decommissioning process presents significant risks.
Some of those risks include:
- environmental damage;
- supply chain challenges, including unavailability of suitable heavy lift vessels;
- delays (whether caused by unpredictability of operations or a fragmented supply chain);
- occupational health and safety issues in performing activities in hazardous and often unpredictable environments; and
- reputational damage should the decommissioning not go according to plan, to name a few.
The risk of insolvency of existing titleholders also arises where new (sometimes under resourced) market entrants acquire ageing assets from established players. To mitigate this risk, many jurisdictions have established a system of trailing liabilities (often in perpetuity), where previous title holders can be called back to undertake decommissioning of assets previously owned by them.
In this complex regulatory and logistical landscape, there is considerable scope for disputes to arise.
Mitigating risks and resolving disputes
One way of contractually allocating these risks among participants in decommissioning operations is to use (and where appropriate to tailor) standard form contracts that have been devised to standardise contractual arrangements for decommissioning activities:
- the LOGIC General Conditions of Contract (Including Guidance Notes) for Offshore Decommissioning (Edition 1, December 2018) (LOGIC), published for use in the UK North Sea; and
- the BIMCO DISMANTLECON Dismantling, Removal and Marine Services Agreement (DISMANTLECON), published for international use.
Both contracts contain a tiered dispute resolution clause as follows:
| LOGIC | DISMANTLECON |
| Tier 1: The owner of the assets and contractor representatives negotiate. | Tier 1: The owner of the assets and contractor representatives negotiate. |
| Tier 2: The parties may refer the dispute to a form of alternate dispute resolution. | Tier 2: The dispute is referred directly to executive directors for negotiation. |
| Tier 3: Either party may refer the dispute to either adjudication to be conducted in accordance with the procedure in the Scheme for Construction Contracts (England & Wales) Regulations (Construction Act) or litigation. The adjudication is binding unless or until the dispute escalates to tier 4. | Tier 3: The dispute is referred to interim adjudication in accordance with the Construction Act procedure, which is binding unless or until the dispute escalates to tier 4. |
| Tier 4: If agreed by the parties, the dispute is determined by litigation or arbitration. | Tier 4: The dispute is determined by arbitration, with four alternate arbitration options provided depending on whether the governing law is English, US, Singapore or other. The dispute may also be referred to mediation once arbitration has commenced. |
While some parties may be content with the standard form contracts, others will seek to tailor a bespoke dispute resolution mechanism suitable to their individual risk profile and the project itself. Contracting parties may consider proposing an alternate dispute resolution process that is more extensive than that contained in the standard form contracts. The use of mediation, for example, allows parties to agree on innovative ways to mitigate risks and overcome challenges in a forum where liability is rendered by a third party.
Where, as is often the case, decommissioning projects involve multiple parties, contractors often seek to tailor a "back-to-back" dispute resolution process to avoid confusion, minimise the risk of jurisdictional disputes, and for consistency and certainty. Where back-to-back dispute resolution processes exist, parties should consider whether the joinder of further parties or consolidation of proceedings is possible, and if so whether it is advantageous. This may depend on where a party sits in the contracting chain.
In addition to the protections provided by well-drafted and considered dispute resolution provisions, contracting parties should ensure they are covered by suitable and adequate decommissioning insurance, such as Decommissioning All Risks (DAR) insurance, which is generally intended to compliment, rather than replace, other traditional insurance such as operator's property and liability cover. Given the broad scope of potential exposure, DAR insurance policies should include the contractor, subcontractors, and their respective affiliates as additional insureds.
For more information on the above, please visit our thought leadership briefing.
Takeaways
In summary, parties involved in decommissioning projects should consider a range of measures to mitigate their risk, including (but not limited to):
- adopting an industry developed standard form contract specific to decommissioning;
- tailoring contracts to adopt flexible and dynamic dispute resolution processes that will mitigate disputes; and
- ensuring the project is suitably insured by DAR insurance in addition to other standard insurances.
