The Nickel Report

Since the first Gulf of Mexico rig was installed in 1947, over 12,000 offshore oil and gas platforms have been installed globally. A 2016 study forecasts 600 will require decommissioning by 2021 and 2,000 more by 2040 at a cost of US$210 billion. Many newer platforms are sited in deeper waters, facing higher decommissioning costs and complexity.

The 1958 UN Convention on the Continental Shelf and 1972 London Convention broadly prohibited ocean “dumping.” Subsequent frameworks recognize exceptions permitting in situ offshore structure decommissioning consistent with internationally recognized standards. The 1982 UN Convention on the Law of the Sea (UNCLOS), for example, requires member states adopt rules no less stringent than the London Protocol, amending the original Convention to allow deliberate placement of subsea structures in defined circumstances. Thus, in situ offshore platform decommissioning has been recognized as conforming with governing treaties and legal frameworks.

Decommissioning rules are well established in some jurisdictions, such as the US Gulf Coast, but are less developed in other regions. Indeed, several jurisdictions where the rules are evolving also are among those with the most aging offshore platforms. Uncertainty surrounding their decommissioning obligations poses challenges for many stakeholders, including communities; platform operators and governments facing the prospect of bearing rig decommissioning costs; and commercial parties wishing to acquire, divest or develop oil and gas assets.

In the face of this growing challenge, several jurisdictions are considering partial removal decommissioning in which upper portions of the rig are removed while lower portions are left in place as marine habitat. Conceived in the US Gulf Coast, “rigs to reefs” (RTR) decommissioning promises reduced environmental impacts, benefits to local fisheries and cost savings shared by industry and governments to support conservation initiatives.

While couched as “win-win,” some stakeholders are skeptical; in some jurisdictions the artificial reefing option has been welcomed while in others it has faced opposition. RTR has been widely adopted in the Gulf Coast with oversight from the federal government and Gulf Coast states, and it is being evaluated or implemented in other regions confronting extensive platform decommissioning obligations, ranging from California to the South China Sea.

Most fixed platforms are sited in water shallower than 400 feet, but, increasingly, rigs are being installed at depths up to 1,400 feet—as tall as the Empire State Building. The “topside” encompasses the deck, crew quarters and drilling rig; the “jacket” supports the topside, constructed of steel structures anchored to the ocean floor. Complete removal decommissioning entails full platform removal. By contrast, RTR decommissioning entails full removal of the topside and a portion of the jacket deep enough to prevent interference with navigation, leaving the jacket bottom in place as marine habitat.

Artificial reef construction has been practiced for centuries and was widely adopted in US coastal states by the middle of the 20^th century. By the 1980s, the US Department of Interior’s Minerals Management Service, now the Bureau of Ocean Energy Management (BOEM), adopted a policy supporting RTR, and Congress adopted the National Fishing Enhancement Act (NFEA), providing an exception to the Outer Continental Shelf Lands Act (OCLA) full removal requirements.

BOEM and Bureau of Safety and Environmental Enforcement (BSEE) currently may approve in situ decommissioning if regulatory criteria are met, including engineering and environmental standards, National Artificial Reef Plan consistency and state acceptance of liability for the artificial reef after platform decommissioning. The RTR application must undergo review pursuant to various federal statutes, including the National Environmental Policy Act (NEPA), in consultation with the US Army Corps of Engineers, Coast Guard, Fish and Wildlife Service and Environmental Protection Agency, among others.

Several Gulf Coast states have established RTR programs under which over 500 platforms have been successfully reefed with federal and state oversight. Along the Gulf Coast, the program has received broad support, widely recognized as enhancing local commercial and recreational fisheries.

According to a 2014 estimate, full platform removal in deeper waters can cost up to $5 million, while converting the platform to an artificial reef costs under $1,000,000—roughly an 80 percent savings. Indeed, the Louisiana and Texas RTR programs do not rely on public funding, instead receiving a share of the savings from reefing platforms in lieu of complete removal. In 2014 Texas reportedly maintained a $4 million RTR fund, while Louisiana’s fund amounted to $18 million, which can be routed to ecological protection programs.

California’s artificial reef program dates back to 1958, with early projects constructed from scrapped automobiles and streetcars. But while artificial reefing was widely considered successful at increasing sport and commercial fisheries, California’s RTR program has progressed more slowly.

Many historians trace offshore drilling’s origins to California, beginning off the coast of Santa Barbara, with the first true offshore platforms installed in the late 1950s. State tidelands leasing is now overseen by the State Lands Commission (SLC), which ceased leasing offshore oil and gas tracts after the 1969 Santa Barbara oil spill; in 1994 the California legislature adopted the Coastal Sanctuary Act, prohibiting new leasing of state offshore tracts. The first federal leases were issued in 1963, but none have been issued off the California coast since 1982.

Twenty-seven platforms currently are sited off California’s coast; four in state waters and 23 on the outer continental shelf (OCS). BOEM estimates California’s remaining offshore platforms will cease production between 2019 and 2034. All of the federally-regulated platforms are at least three miles offshore, at depths up to 1,500 feet; thus, their greater depth and mass make jacket removal significantly more complex and costly than in the Gulf. At least seven platforms in state waters have been decommissioned but, to date, none by artificial reefing.

California RTR legislation was first proposed in 1998 but not adopted until 2010’s AB 2503, the California Marine Resources Legacy Act (MRLA). MRLA grants California’s Department of Fish and Wildlife (DFW) authority to review RTR applications, subject to CEQA review and California Coastal Commission determination of conformity with the California Coastal Management Plan.

Two additional divisions of California’s Natural Resources Agency also are charged with reviewing partial removal applications. The Ocean Protection Council (OPC) evaluates whether the application will, on balance, benefit the marine environment as compared with complete removal; if reefing is approved, the State Lands Commission (SLC) estimates the avoided removal cost, a majority of which must be granted to the state. The platform operator must fund state decommissioning oversight, indemnify the state and retain liability for any residual oil seepage or release.

Despite cost savings and potential ecological benefits, some stakeholders view RTR as less viable in California than the Gulf because of California’s less developed legal infrastructure and differing ecology. These stakeholders dispute whether current research sufficiently demonstrates long-term net benefits, for example, and whether studies from other regions are representative of differing California coastal conditions. By contrast, the 2010 Ocean Science Trust report commissioned by OPC concluded partial removal could provide significant net benefits to marine life, based on an extensive survey of studies demonstrating enhanced marine species productivity near platforms.

RTR also faces hurdles in the North Sea, where it has been over 20 years since reefing of an offshore structure was attempted. Despite British government, Oslo and Paris Commission determinations that reefing of the Brent Spar platform in UK waters would result in negligible environmental impacts, Green Peace organized an aggressive campaign opposing the plan, including boycotts and a well-publicized boarding of the platform at sea. After several governments protested under public pressure, the proposal was withdrawn.

Although NGO allegations were later criticized as overstated, the Brent Spar incident continued to influence regional policy, including a series of OSPAR decisions effectively prohibiting in situ decommissioning. Given nearly 500 platforms in the region are expected to cease production by 2025, stakeholders are attempting to revive discussion of RTR’s benefits. Any such proposal is likely to meet political resistance even today, however, and would require substantial technical justification and policy advocacy.

On the other side of the globe, Indonesia and Malaysia top the list of regions with looming offshore platform decommissioning obligations. In addition to allocating financial responsibility between current and future operators and national oil companies (NOCs), such uncertainty also could impede international investors’ efforts to divest assets in the region, given prospective purchasers face substantial and uncertain decommissioning costs. The uncertainty also could undermine investor confidence in new projects.

Across the region, greater clarity is needed. A recent study concluded Asia hosts over 1,750 offshore oil and gas assets, with 85 percent sited in Malaysian or Indonesian waters and most being 20 years or older. More than 200 offshore fields are expected to stop producing in Southeast Asia by 2030, with projected decommissioning costs of up to US$100 billion according to the International Energy Agency.

The issue is especially acute in Indonesia, where production-sharing contracts (PSCs) governing many concessions will expire over the next decade. Operators or investors may view the government or NOC as bearing responsibility for decommissioning costs, because PSCs often define the state as owner of the assets, given it has effectively paid for them through contractual mechanisms allowing operators to recover sunk costs before triggering revenue sharing provisions. Governments and NOCs employing the PSC structure, on the other hand, may assert the operator is responsible for costs of decommissioning and compliance with environmental regulations regardless of state ownership. Indonesia has a decommissioning legal framework, but has not fully clarified requirements governing procedural, technical and financial assurance issues.

Malaysia has a legacy of effective artificial reef construction for fisheries enhancement, independent of offshore platform decommissioning. In recent years Malaysia’s government and NOC, Petronas, have embraced RTR as a “sustainable decommissioning” option, citing the program’s environmental, social and economic benefits. Malaysia’s Baram-8 decommissioning was the first offshore platform reefing project in the South China Sea and is widely considered a success.

Similarly, Brunei Darussalam has had an artificial reef program since 1988. Since then, at least seven decommissioned rigs have been reefed off its coast; Brunei has requested additional platforms from neighboring countries to expand its artificial reef program.

Thailand hosts 334 offshore platforms, according to a 2013 report, many approaching end of production. Like Malaysia and Brunei, Thailand is evaluating RTR in parallel with its artificial reef program; a demonstration project is being undertaken to determine requirements for successful acceptance and implementation. In Thailand, as elsewhere throughout the South China Sea, however, further effort is needed to more clearly define and equitably allocate offshore platform decommissioning obligations, regardless of the method employed.

While the legal and political dynamics differ outside the US, a similar debate is unfolding in California, the North Sea and South China Sea. In the former regions, decommissioning obligations are well defined, but significant work remains to evaluate RTR’s prospects. In the latter region, RTR is gaining support based on the model pioneered in the US Gulf Coast, but uncertainties surrounding the ultimate responsibility for offshore platform decommissioning costs pose challenges to the region’s oil and gas industry and local economies alike.

Given the vast number of platforms facing imminent decommissioning around the globe, both questions require significant attention to ensure a responsible balance between natural resource development and environmental protection.