Key Considerations in Responsible Oil Production and Decommissioning

Introduction

Nigeria’s Oil and Gas Industry faces a crisis that stakeholders are only just paying attention to; responsible oil production and decommissioning. It is a threat that has lingered since the very dawn of oil production in Nigeria. At its core, it involves three questions.

1. What will become of the heavy-duty equipment used to extract petroleum resources once they have been exhausted?

2. What happens to the environment once the season of exploitation is over?

3. Who will bear the cost of solving these two issues?

These three questions will determine the path Nigeria’s oil and gas industry follows.

What is decommissioning?

No oil production asset, onshore or offshore, be it a well, a terminal, or a pipeline lasts forever. According to the hyperbolic decline rate reservoir model, an oil well has a 20-30 year lifespan. Upon reaching the end of its productive season an oil site should be restored to its original condition through the removal of infrastructure used during operations, environmental remediation and land restoration to account for any spills or pollution that has occurred over the years of production.

Operators must plug well bores with cement to prevent ground water contamination; storage tanks, well heads, waste handling pits, processing equipment and pump jacks must be removed as stipulated by the Environmental Guidelines and Standards for the Petroleum Industry. This process is known as decommissioning.

Decommissioning is only a part of the responsible production process. Oil and Gas assets should be exploited responsibly with heavy emphasis on maintenance. Original Equipment Manufacturer maintenance stipulations, local regulations and international best practices should be adhered to.

Why must we decommission oil and gas assets?

If oil wells are not properly decommissioned, and oil resources are not exploited responsibly a range of negative externalities arises.

Abandoned wells are an environmental problem, a health hazard and a public nuisance. They have been linked to several instances of ground water contamination, polluting water sources with carcinogenic materials like benzene, a chemical which is believed to cause aplastic anaemia and leukaemia.

These wells also emit methane, a gas which has 80 times more global warming potential than carbon dioxide over the first 20 years after it reaches the atmosphere. When oil fields are not properly decommissioned, they continue to pollute the air with methane and contaminate ground water from which local populations derive potable water in perpetuity.

Waste generated by oil exploitation is toxic and must be removed. If it is not removed the hazardous materials continue to pollute the land, reduce the health outcomes of local populations and completely interfere with their ability to make a living. This is especially true because many communities in the Niger Delta are rural and rely on fishing and farming to earn a living. These two activities become difficult when abandoned oil wells are spewing poison into soil and polluting rivers. Nigeria already suffers from the effects of lapses in the responsible oil production process

What is international best practice on decommissioning and environmental remediation post oil production?

Decommissioning is a costly process. For example, the British Government has estimated the cost of decommissioning 600 fixed installations and plugging 7000 oil wells in the North Sea basin to be $150 billion. According to Wood Mackenzie, the cost of decommissioning works worldwide will be about 104.5 billion US dollars by 2030. As a result of the high cost of decommissioning and post production environmental remediation, oil companies are expected to estimate the amount the process might come to. Following this, they’re expected to put money aside to cover this expense.

This can be done in a number of ways. The company can obtain a letter of credit from a bank which ensures that all decommissioning costs are covered. This is standard operating procedure in the United Kingdom where operators are encouraged to enter a Decommissioning Security Agreement.

In some cases reserve trust funds are established for decommissioning. These are funded by a fraction of the revenue received or the profit made for each barrel of oil produced at each field. This fund would accumulate over time and would be available for funding decommissioning and environmental remediation activities after the life of the asset. This fund is also usually reported in the operator’s financial reports.

These processes are enshrined by the international accounting standards, laws and conventions. In addition to this, they are observed by international oil companies all over the world.

How is decommissioning practiced in Nigeria?

While Nigeria has laws, regulations and guidelines that protect the environment and lay out the process for responsible oil production which ends with effective decommissioning These include the petroleum industry Act, and the Environmental Guidelines and Standards for the Petroleum Industry in Nigeria. However, a quick look at the state of the environment in the Niger Delta shows that these laws, regulations and guidelines, have been ignored, and that enforcement is weak.

Does the recent divestment round by the IOCs change anything?

Recently, International Oil Companies operating in Nigeria have been divesting from their onshore and shallow water assets. In the last decade alone IOCs have exited their ownership of 26 Oil Mining Licenses. Shell Petroleum Development Company (SPDC) has parted ways with OMLs 4, 17, 18, 29, 38 and 42. Chevron has sold its shares in OMLs 83 and 85 with further plans to sell OMLs 82, 86, and 88. Total has also made plans to let go of its Nigerian Onshore and Shallow water projects. Recently, Exxon Mobil announced that it plans to sell its entire Nigerian shallow water and onshore portfolio to Seplat Energy. It is a move that has attracted the intense attention of the Nigerian National Petroleum Company (NNPC).

One of the biggest concerns industry stakeholders have about the divestment strategy being executed by International Companies is the question of responsibility. Oil production comes with environmental degradation. Nigeria has not been without its fair share of oil spills over the years. According to the National Oil Spill Detection and Response Agency there were 4,919 oil spills between 2015 and March 2021. Many of them are yet to be properly cleaned up, and their sites are yet to be completely remediated. Oil companies have a duty to execute these projects but what happens when there is a change of ownership? Does the liability remain with the original facility operator or is it transferred to the new owner of the oil field? In addition to this who bears the cost of the decommissioning of the asset, the new owner or the old owner? Clarity is needed on historic operator liability and current operator liability for decommissioning.

Conclusions

There are many fields in Nigeria that require immediate decommissioning or will do so in the near future. The Federal government must shed light on where the financial liability lies and impose on the liable party the duty of investing in the activities required to achieve responsible oil production and effective decommissioning.

Around the world there is evidence of provisions international oil companies make towards ensuring the safety of the environment. The same measures should be applied in Nigeria as well. If there have been funds set aside for environmental remediation and decommissioning then stakeholders have the duty to audit the application of the funds.

For more information contact us

Damilola Ade-Odiachi

Communications and Client Services Manager, IPMC.

Damilola.odiachi@ipmc-ng.com

Independent Project Monitoring Company Limited