The IBA’s response to the war in Ukraine
Country Updates – March 2023
COUNTRY UPDATE – AUSTRALIA
Trailing liability for asset decommissioning in Australia
Corrs Chambers Westgarth, Sydney, New South Wales
Corrs Chambers Westgarth, Sydney, New South Wales
Australia’s total asset decommissioning liability is estimated to exceed AUD60bn between 2020 and 2050.1 This issue is particularly acute with many fossil fuel assets facing early retirement as a result of the clean energy transition. Consequently, decommissioning stranded or end-of-life assets is becoming an increasingly significant consideration for businesses across a wide range of industries.
Australia’s piecemeal legislative framework for dealing with decommissioning is, in many respects, confusing and inconsistent. Presently, the framework consists of an industry-specific array of federal and state-based legislation and regulations. For example, the Offshore Electricity Infrastructure Act 2021 (Cth) regulates decommissioning of offshore wind farms and associated electricity transmission infrastructure, while the Water Act 1989 (Vic) regulates decommissioning of public and private dams.
Until recently, this legislative framework rarely extended decommissioning liability beyond the asset’s current titleholder. For example, the Petroleum (Onshore) Act 1991 (NSW) holds the current titleholder of onshore petroleum assets in NSW responsible for decommissioning but does not provide any safeguards against the titleholder’s insolvency or inability to decommission the asset.
The dangers of such a regulatory framework are obvious and were highlighted by the collapse of the Northern Oil and Gas Australia Pty Ltd (NOGA) corporate group in February 2020. One of the NOGA companies, Timor Sea Oil & Gas Australia Pty Ltd (TSOGA) held a petroleum title in the Timor Sea and owned and operated the Northern Endeavour floating production, storage and offtake (FPSO) facility.
TSOGA had acquired the FPSO from Woodside Energy Ltd (‘Woodside’) after Woodside had decided that the asset and the field had reached the end of their commercial operating period.
NOGA intended to extend the life of the FPSO. However, a number of technical and commercial issues arose (including concerns with corrosion and operational safety issues). These issues resulted in the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) issuing a Prohibition Notice on 10 July 2019 and, ultimately, a General Direction requiring the FPSO to cease production on 18 July 2020.
As a consequence, the group entered into voluntary administration in September 2019. When it subsequently entered into liquidation on 7 February 2020, it was left unable to decommission the FPSO and the field. The AUD250m decommissioning liability eventually fell upon the Commonwealth Government, which will recover the costs of decommissioning through a temporary levy on offshore petroleum production (under the Offshore Petroleum (Laminaria and Corallina Decommissioning Cost Recovery Levy) Act 2022 (Cth)).
In response to the NOGA liquidation, on 2 September 2021 the Federal Parliament passed the Offshore Petroleum and Greenhouse Gas Storage Amendment (Titles Administration and Other Measures) Act 2021 (Cth) (the ‘Act’), which came into force on 2 March 2022. The Act introduces a trailing liability mechanism for decommissioning offshore oil, gas and carbon capture and storage assets.
The Act only applies where the current titleholder is unable to meet its decommissioning obligations or where previously completed decommissioning work is defective. Trailing liability is intended to be a last resort; the primary obligation to decommission the asset still falls upon the current titleholder.
The Act permits NOPSEMA to issue remedial directions extending liability to former titleholders, their related bodies corporate and any other person who, on or after 1 January 2021:
- has or could have significantly benefited from the operation of the asset;
- has been in a position to influence the extent of another person’s compliance with the Act; or
- has acted jointly with a titleholder in operating the relevant asset.
The scope of NOPSEMA’s power is broad enough to potentially capture a wide range of non-titleholder parties, including joint venture partners, secured financiers and royalty holders. This provides a stark contrast to the broader national decommissioning liability framework, which does not impose decommissioning liability on any parties beyond the current titleholder.
Similar trailing liability legislation already exists in international jurisdictions including Norway, the United Kingdom and the United States.2
Whilst the NOGA collapse may have prompted the introduction of the Act, there is no conceptual reason why trailing liability should be limited to offshore oil, gas and carbon capture and storage assets.
Certainly, the potential cost exposure for these assets is considerable and the immediate environmental risks from a catastrophic failure makes their safe decommissioning a priority. However, the fundamental issue of an insolvent or incapable titleholder ultimately passing a ‘clean-up bill’ back to the taxpayers is something which one may expect to have broader application than just under the Act.
Consequently, having regard to the very significant pipeline of decommissioning activities noted above, we may well see the introduction of state or federal trailing liability legislation which extends decommissioning liability to a far wider class of assets. For example, the Victorian Government has already announced an intention to introduce trailing liability for decommissioning coal mines under the Mineral Resources (Sustainable Development) Act 1990 (Vic).3
As such, it will become increasingly important for parties to consider their potential decommissioning liability exposure and structure transactions accordingly. This may include a consideration of a variety of risk mitigation measures such as security arrangements, indemnities in favour of prior asset holders and cross-guarantees. Such exposure may also have an effect on the commercial value of assets which are close to the end of their life, which will also become an increasingly important consideration for parties dealing with these assets.
1 See ‘Australia Oil & Gas Industry Outlook Report’ (March 2020) Wood Mackenzie at https://appea.com.au/wp-content/uploads/2020/06/Australia-Oil-and-Gas-Industry-Outlook-Report.pdf, accessed 21 January 2023.
2 See ‘Discussion Paper – Decommissioning Offshore Petroleum Infrastructure in Commonwealth Waters’, pp 71–77, at https://storage.googleapis.com/converlens-au-industry/industry/p/prj1a4840b4d0ea81fed6711/public_assets/Decommissioning
%2520Discussion%2520Paper.pdf, accessed 22 January 2023.
3 See www.premier.vic.gov.au/sites/default/files/2022-05/2205006%20-%20Improving%20Certainty%20For%20Coal%20Mine%20Rehabilitation.pdf, accessed 22 January 2023.
About the authors
Trevor Thomas is a partner at Corrs Chambers Westgarth, Sydney and can be contacted at firstname.lastname@example.org.
Thomas Milner is a lawyer at Corrs Chambers Westgarth, Sydney and can be contacted at email@example.com.
COUNTRY UPDATE – SWEDEN
Mattias Wiklund Matala
Can the agreed price be changed due to abnormal changes of cost for materials? A study of the Swedish standard form contracts AB 04 and ABT 06
During the past two years, the construction industry in Sweden has faced major challenges due to price increases of building materials. The pandemic, raw material shortages, the war in Ukraine and sanctions against Russia are some of the factors behind the cost increases that have come to affect the Swedish construction industry. In November 2022, Statistics Sweden (Sw: Statistikmyndigheten SCB) announced that the annual rate of the construction cost index in Sweden was at its highest since 1974.1 As a result of these cost increases, the provisions in the Swedish standard contracts for construction projects, AB 04 and ABT 06, allowing for the adjustment of agreed prices have seen renewed relevance. The specific provisions are set out in chapter 6, section 3 and allow for changes to the agreed price in case of increases or decreases of the cost of material or other necessities. The provision reads as follows in the official English translation:
‘Agreed prices shall be adjusted with regard both to changes in costs resulting from the official action, and changes in costs caused by war or other crisis situation with similar effect which relate to supplies or services which are essential to the Total Works, and changes in costs due to abnormal price changes relating to materials included in the Total Works. Adjustment of the agreed price must however be made only if the change in costs has not been foreseeable and it substantially affects the whole cost of the Total Works.’
The requirements in the provision are the following:
1. Changes in costs caused by:
(i) official action (ie, actions by government authorities);
(ii) war or other crisis situation with similar effect on essential supplies or services; or
(iii) abnormal price changes relating to materials included in the Total Works;
2. unforeseeability; and
The legal consequence relevant when Chapter 6, section 3 is applicable is a change of the agreed price. The provision does not specify how a court or tribunal is to quantify the ‘change’ and, consequently, the sum to be awarded. However, it is likely that a court or tribunal faced with interpreting this part of the provision will be left to base any award on an assessment of the reasonability in the claimed adjustment.
The provision has close links to a clause often used in Swedish construction contracts during the oil crisis in the 1970s. The association for contractors (Sw: Svenska Byggnadsentreprenör föreningen) provided their members with a clause to incorporate in their contracts, referred to as ‘Reservation 2/71’. Reservation 2/71 is almost identical to the provision in Chapter 6, section 3. It therefore seems that Reservation 2/71 was incorporated into the standard contracts at their respective inceptions in 2004 and 2006. There is no known case law regarding either Reservation 2/71 or Chapter 6, section 3, apart from a Court of Appeal decision from the 1970s, that is, the Court of Appeal over Skåne and Blekinge, 17 April 1978 in case No T 188/76. The application of the provision includes several elements of uncertainty. This is partly due to the lack of relevant case law and partly since the provision consists of several requirements that are vague in themselves: unforeseeability, substantiality and reasonability.
This uncertainty has left the provision open to contract interpretation. As AB 04 and ABT 06 are standard agreements developed by an organisation called Byggandets Kontraktskommité, which consists of representatives from contractors as well as employers, the standard agreements are a result of compromises between both sides of the construction industry. It follows from the nature of such ‘agreed documents’ that interpretation is given a prominent role. The Swedish Supreme Court has during a series of cases established a method for interpreting these standard form contracts in line with general principles of Swedish contract law. This method takes as the starting point the common intention of the parties. If no common intention can be established, and there is no other evidence, outside the contract, as to how the parties understood the disputed provision, the interpretation should be focused on the wording of the provision itself. This assessment must be guided by the system established in the standard contracts seen as a whole, meaning that things such as the content of the relevant chapter and words, terms and definitions used in other provisions is taken into account. Such assessment should also take into account other provisions in the standard contracts that may be relevant. There may also be reason to interpret the conditions in light of the special features of construction law. Lastly, the interpretation should examine the conditions in light of the dispositive law that would have been applied if the agreed conditions had not existed.
Chapter 6, section 3 is a so-called fixed provision. In the preface to AB 04 and ABT 06, it is stated that the standard agreements ‘... are based on a reasonable balance between rights aimed at an economically optimal distribution of risk between the parties. Changes to these regulations must therefore be avoided ...’. Fixed provisions are treated differently than so-called framework conditions, with respect to which the preface states that ‘... it is left open for the parties to agree on another regulation ...’. Accordingly, there is reason to assume that the fixed regulations play a special role for the intended optimisation of economic risk allocation between employer and contractor.
During the spring of 2021, memorandums were written by the industry organisation Byggherrarna,2 which represents the employers, and Byggföretagen,3 which represents the contractors, addressing how Chapter 6, section 3 should be interpreted in the absence of relevant case law. In the light of the above-mentioned method for interpretation of standard contracts, the organisations sought to provide their member companies with good arguments to support their negotiations with their respective counterparties. The question that chiefly split the positions of the two organisations was the interpretation of ‘substantiality’. Byggföretagen referred to the low profit margins within the construction business and to historical statements about Reservation 2/71. They also referred to Chapter 6, section 6, noting that this provision deals with compensation for contract variations and that in such case, an increase or decrease above 0.5 per cent of the contracting sum is considered substantial. With regard to this, Byggherrarna considered that the limit for substantiality should be between 0.5 and three per cent of the contracting sum. Byggföretagen, on the other hand, considered that the employer’s calculations, in order to protect themselves against a potential risk of price increase, would play a major role in the assessment of substantiality. Therefore, the organisation considered that a particular limit for substantiality should not be predetermined but should be a matter of examination on a case-by-case basis.
The latest development in the matter is that the Swedish Transport Administration (Sw: Trafikverket), released a memorandum on 24 November 2022, dealing with the interpretation of Chapter 6, section 3.
As the Swedish Transport Administration serves as the client for the majority of road, rail and waterway design and construction works in Sweden, the memorandum was received with great interest from the construction industry. As set out in the memorandum, the Swedish Transport Administration noted that a reasonable limit for the condition of substantiality should be 2.5 per cent of the contract sum. As relates to the question of abnormality of cost increases, the administration stated that the contractor must show what the cost for material amounted to at the time of the start of the period during which the abnormal cost changes occurred, as well as actual costs at the time of purchasing the material. According to the administration, the costs must be verified with invoices or other evidence – index development is not acceptable as evidence.
The administration has also taken a position regarding when the price changes became abnormal, using the historical development of the Swedish Transport Administration’s investment index as basis for its analysis. This index shows a sharp increase at the beginning of 2021. Accordingly, the administration considers that the abnormal cost increases started as of 1 January 2021. As for the potential price adjustments, the administration considers that the contractor must bear the risk up to the limit for substantiality – 2.5 per cent of the contract sum. However, the administration undertakes to bear the risk of all cost change above that, provided that the contractor has acted loyally and in good faith.
It is obvious that the Swedish Transport Administration intended to make a clear statement through its memorandum. However, this position should not be confused with a de lege lata position. Even though the Central Bureau of Statistics announced that construction costs had started to decrease in December 2022, the basis of many construction contracts has been severely impacted by the reigning market conditions of the last two years. In many of these cases, it is still uncertain how the applicable standard terms and conditions will be applied if a claim is brought in court or arbitration and whether, and to what extent, the contractor will be entitled to adjustment of the agreed price.
About the authors
Mattias Wiklund Matala is a Partner and co-head of Setterwalls’ Construction Law Department and can be contacted at Mattias.Wiklund@setterwalls.se.
Julia Gustavsson is an associate at Setterwalls and can be contacted at Julia.Gustavsson@setterwalls.se.