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Decommissioning of oil wells: Matters arising – bankruptcy, insolvency bill (1)

“Decommissioning” (or “abandonment”) means to plug an oil well, permanently dismantle associated oil installations and leave it in a safe and secure condition. Decommissioning is a form of environmental remediation. The failure to decommission wells is a prevalent environmental issue in oil-producing countries around the world. In Nigeria, the decommissioning issue is not as full-blown as it is in other oil-producing countries, perhaps due to the fact that most of oil fields in Nigeria are still in their productive phase and do not yet require decommissioning.

However, there are strong indications that the decommissioning problem in Nigeria is a ticking time bomb as there is a looming upsurge in the number of inactive wells that would be in need of decommissioning in no time. In 2015, the Federal Government (FG) acknowledged that Nigeria’s oil reserves would dry up in 25 to 30 years. Recently, the Department of Petroleum Resources (DPR) also acknowledged that Nigeria’s oil reserves will be completely depleted in 49 years. Expert studies also suggest that Nigeria is in its oil peak and majority of its oil wells are set to be depleted in a few years. Also, there has been significant decline in crude oil production from onshore wells to offshore wells.

The international oil companies are not only beginning to divest from onshore fields but are transferring their equity to local smaller companies which are without financial portfolios strong enough to handle decommissioning.

Typically, oil companies may stop operations and production from an oil well due to a number of reasons including exhaustion of the well, expiration of licence, temporary suspension of operations with a view to resuming activities at a later date, or that the company simply no longer requires the well. These wells, if not decommissioned, pose serious risks to public safety and the environment. Such risks include contamination to groundwater, marine/surface environments, and methane emissions which could pose explosion risks.  especially when methane gas accumulates in inadequately ventilated areas. The DPR has the power to direct oil companies to undertake decommissioning.

Issues arising from the bankruptcy & insolvency bill

While there are regulatory and administrative mechanisms put in place to ensure decommissioning, there remain significant gaps in existing financial mechanisms. One of such gaps is the absence of adequate financial arrangements for decommissioning by bankrupt oil companies. In other words, where an oil company that is bankrupt is required to undertake decommissioning, how would such decommissioning liabilities rank in priority among other debts and liabilities of the company.

The implication of the inability of an oil company to discharge its decommissioning responsibilities due to bankruptcy is that the responsibility falls back to the government, since the government has the primary responsibility of protecting the environment. Such decommissioning would have to be funded by the government (using public funds i.e. taxpayers’ money and revenues), thereby violating the polluter pays principle – the principle that persons responsible for polluting the environment should be those held responsible for paying for damage occasioned by such pollution. In this situation, such decommissioning liabilities may be enforced by the government as a claim government in bankruptcy proceedings.

The Companies and Allied Matters Act (CAMA) and the Bankruptcy Act regulate bankruptcy and insolvency of companies and individuals respectively. Neither CAMA nor the Bankruptcy Act has an express provision on a company’s liability for environmental remediation should the company become bankrupt. There are also no stipulations as to how environmental remediation liabilities will rank in priority against other liabilities of a bankrupt company. However, the yet-to-be-assented Bankruptcy and Insolvency Bill (BIB) seeks to address this lacuna by making provisions on liability of a company for environmental remediation during bankruptcy. This author believes, however, that the provisions of the BIB are inadequate in addressing the issue and would expose the Nigerian government to unnecessary financial burden. The BIB stipulates that costs for remedying any environmental condition or damage are provable claims against a bankrupt company (Section 192).

This means that the government can claim the cost for decommissioning from a bankrupt company undergoing bankruptcy proceedings. However, the BIB provides that all provable claims by government are to rank as unsecured claims (Section 78). Unsecured claims (i.e. debts without security/collateral) are the least ranked in the order of priority of claims against a bankrupt company. The implication is that decommissioning liabilities would only be satisfied after every other liability of the bankrupt company has been discharged. Thus, where the assets of the bankrupt company are insufficient to discharge all its debts (which is almost always the case in bankruptcy proceedings), there will be no funds available for decommissioning, and government will have to bear the financial burden of such decommissioning.

 

Unwana Udo

Unwana Udo is a Nigerian Lawyer currently undertaking an LLM at Dalhousie University, Canada where he is researching on topical issues in environmental/climate change law. He can be reached on unwana.e.udo@gmail.com.

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