Politics

Landowners could face fracking clean-up costs, MPs warn

pnr 170822 Ros Wills5

Cuadrilla’s Preston New Road site, 22 August 2017. Photo: Ros Wills

Owners of fracking sites may be liable for the clean-up if project backers go out of business, MPs said in a report published today.

The Public Accounts Committee, which has been investigating oil and gas decommissioning, said it had been told by the government that landowners could ultimately be held responsible for the costs.

Today’s report said the onshore industry carried greater risks than offshore operations:

“fracking is conducted by smaller companies, with less financial backing, meaning they could be short lived.”

The Department of Business, Energy and Industrial Strategy (BEIS) told the committee it would consider the ability of a company to meet decommissioning costs when deciding whether to give consent for operations. BEIS could require operators to put money aside for the work, it added.

BEIS also said the Environment Agency would consider decommissioning when granting a permit to oil and gas sites.

In a letter to the committee, BEIS said:

“the Environment Agency will not allow surrender of a permit until sites have been returned to satisfactory condition. As part of this, the Environment Agency has the ability to impose conditions on permit holders, further mitigating the risk of pollution. ln the event the permit holder company is no longer in existence, the Environment Agency would have the ability to pursue former directors from that company.

“Ultimately, should all these safeguards fail, the Environment Agency would carefully consider the specific circumstances of the case, and identify if there were other appropriate parties who could bear responsibility, for example, the landowner.”

BEIS added:

“Some landowners, having entered into leasing arrangements for extractive activities to take part on their land, will have insurance in place in order to mitigate the risks associated with these activities.”

“Worrying lack of understanding”

The report said it was concerned that determining liability may not always be as straightforward as the BEIS believed and that liability could fall to the government.

It said:

“The department has a worrying lack of understanding of the potential for government liability to decommission assets used in fracking.

“The department must ensure it sets the terms for how fracking assets are decommissioned before the industry grows further.”

It asked BEIS to explain, by the end of June 2019, the decommissioning arrangements for fracking. The committee also called for:

“a full and clear explanation of the responsibility for subsequent costs once licences have been returned to the Government, and what it is doing to prevent liabilities falling to taxpayers.”

“Government support may become incompatible with climate objectives”

The report also concluded that government support for oil and gas may become incompatible with its long-term climate change objectives.

It urged BEIS to set out, as part of the energy white paper expected during 2019, how government support for oil and gas would remain compatible with wider energy objectives.

27 replies »

  1. Some people from the Greater Manchester area, may remember the fridge/freezer mountains and fires (https://www.manchestereveningnews.co.uk/news/greater-manchester-news/work-begins-to-clear-fridge-mountain-1132932). The residents of Greater Manchester were failed by the Environment Agency (EA), Greater Manchester Waste Disposal Authority (GMWDA) and Greater Manchester Waste Ltd (GMW). They had two years to prepare for the EU directive on waster fridges and freezers, but had nothing in place (think Brexit). They employed Britannia Import and Export, to deal with the fridges and freezers. A company, the EA, had found and fined, for falsifying documentation and breaching the Montreal Convention, but did not remove their license to operate. So, we ended up with fridge/freezer mountains, multiple large scale fires, causing unknown damage to the environmental and to local residents health. All this and the cost of the clean up, coming mostly out of the tax-payers pocket!
    This report confirms, what most of us know from past experience, we will end up paying for the clean up of onshore oil and gas sites, with our taxes and our health.

    • Patrick

      The report addresses fracking sites, but you are right in that it also applies to conventional,oil and gas sites.

      So far there has been no great taxpayer expenditure to restore oil oil sites in Notts and Lincolnshire ( a visit to Dukes Wood Near Eakring is always good ), although some are a bit late in being sorted.

      In addition, there has been no impact on anyone’s health from these sites, being those awaiting remediation or those which have ( which are only to be found by looking at an old map ).

      So I think that Is a fact, we do not always end up paying for the clean up of onshore oil and gas sites with out taxes and our health. Although some may think so from past experience.

      Re white goods mountains. Was that issue specific to Manchester, and of so is the incompetence yo note local to that part of England, as the problem does ( did ) not seem to be country wide?

      Fracking sites may offer more risk.

      There has been taxpayer funds to restore coal mine sites, steel sites ie ex nationalised industries which are a matter of record.

  2. Pretty stupid landowners who would enter into a contract without such liability clearly and legally defined. Just keep the contracts with farmers-they are certainly not that stupid.

    • The industry has been renting sites. Many leases between drilling company and land owner available to view from land registry. If you rent instead of buying you could avoid the long term liability. In many cases it would be far cheaper to buy land than rent it yet they still rent it. I doubt all the land owners have Joined the dots.

      • In a response from LCC development control regarding the plug and abandonment of the Becconsall site i was informed

        ‘The name on the application form does not matter. Planning permissions run with the land and therefore the name of the applicant is irrelevant’

        I have spoken directly with a landowner in Lancashire approached by a shale gas drilling company. It didn’t take him long to say no. Smart guy.

      • Based upon” lots of cheap oil and gas sloshing around the world”, John, your doubts that land owners have joined the dots is perhaps second to that, but still not a high bar. If a land owner has such problems, then there are plenty of contract specialists available to advise them.

        Is this the same Public Accounts Committee that allowed energy bills to rise by £500M PER YEAR because a contract for ONE off shore wind farm was overpriced?

    • And when the company goes bust or no longer exists? These wells are in the ground in perpetuity. The O&GA recently admitted, when asked about this by Lee Rowley MP, that liability under these circumstances will rest with the landowner. It is not a case of stupidity, it is how the law works. And I doubt very much, given low public support and opposition to fracking that tax payers will agree to pay to clean up the fracking industry’s mess. The government must ensure that these companies are held to account, possibly by paying a significant sum upfront for long term monitoring and “insurance” This would be in addition to an upfront payment for plug and abandonment etc. Any payment would need to be significant, given how expensive it is to deal with contaminated land. ReFINE have already recommended that unconventional wells should be monitored in the longer term ie after the site has been restored.

        • Thank you hewes62 for providing a link, I am familiar with this report. This report does state it looks at vertical leakage in more detail but acknowledges there can be well integrity issues that can pollute land and water. I think it is also worth bearing in mind the scale of an onshore shale gas industry compared to the much smaller conventional onshore industry the U.K. has experienced to date. Fracking requires a much greater number of wells, drilled and fracked over a much shorter period. The more wells does of course impact the risk of potential problems and the costs involved.

          • Kat T

            Thanks

            I popped it there to save others rooting round for it. But yes, if shale took off then, given the number of expected wells more monitoring would be in order than in the past.

      • KatT
        It is certainly an interesting subject.

        https://www.blackfriarsgroup.com/is-damage-caused-by-fracking-covered-by-insurance-policies/

        I think that the risks from a frack site would inform the discussion, but that this is quite a controversial subject on this site.

        At present I would consider exploratory holes low risk and not an issue, with conventional oil and gas covered by past experience.

        For sites that frack there may be additional risks, but the insurance industry will consider probability, especially in terms of land contamination ( failure of primary and secondary containment plus failure of the liner ) and so on.

        I see the largest issue to be seismic activity. A large seismic even, which damages buildings and infrastructure could be linked to fracking activity, leading to a large amount of claims.

        Other issue are

        1. Limited Liability Companies

        Fracking companies are LTD, and as such would not be liable for everything that goes wrong in perpetuity … by law. A challenge to that concept is a challenge to a key business concept underpinning how we do business.

        2. Damages from emissions within legal limits would not be entertained by the insurance industry, hence damages to health from the M55 are not recoverable via insurance ( although a claim on VW may work through the courts ), similarly to any perceived issue from flaring.

        Just my opinion of course on an interesting subject.

  3. It would be interesting for Cuadrilla were to be approached for a statement on how they believe this matter of decommissioning costs and also third party liability for damages stands?
    I believe as far as Lancashire County Council planning were concerned NO third party liability insurance cover was required.

    • My understanding is there is no third party insurance available. The industry should be made to make substantial upfront payments to be held by local authorities to cover any clean up, restoration and long term monitoring and inspection costs. Otherwise the landowner is liable. The public purse cannot be expected to pick up the industry’s costs after contracts that have been made between a company and private land owner.

      • KatT

        Restoration and any required monitoring or inspection is not a third party insurance issue.

        Third party insurance covers a claim of damages by a third party against the insured.

        http://www.businessdictionary.com/definition/third-party-insurance.html

        This third party insurance does not cover damages to the first party by itself or a third party ( it seems from the link ) under that insurance.

        Hence insurance is not the issue re restoration, the ability of the company to pay for this ( in terms of a bond or whatever ) is … as you allude to.

        Maybe a council would seek insurance to pay for restoration, should companies fail, but that would not be third party insurance.

        • hewes62 many thanks for your reply, I do understand third party liability and apologise if I didn’t make that clear. It is an interesting issue. Obviously the purpose of insurance is to indemnify a party so far as possible from risk and cost. The parties to the contract will have contractual powers to sue the company if they do not perform the terms of the contract, which will obviously contain an obligation to restore the site. But if for example the company goes bust or land is contaminated at some point in the future, when perhaps the company no longer exists etc, then the landowner will be liable. My understanding is there is no insurance provision available for these risks. Businesses/landowners that adjoin a fracking site may also hope to obtain insurance against their land being contaminated or adversely impacted by adjoining fracking activity but again, I believe there is no insurance cover for this either. And without getting into an inappropriate level of detail there has also been changes to the law whereby it may prove more difficult for adjoining landowners to bring a legal claim, in cases of contaminants interfering with their land, than it was previously. There is a lot of complex law that has not yet been tested in the courts where fracking is concerned.

  4. The UK offshore industry is currently going through a decommissioning scenario now and through the next 20-30 years, the cost of decommisioning is estimated to be in the region of 50 to £80 billion to exit the North Sea of which every tax payer in the UK is liable for 50% of that cost! If you believe the landowner is liable for the clean up cost, think again the operator and the government are liable, (i.e. the UK taxpayer). Just as well the operator starts to produce gas production to pay tax and the future clean up costs in 20-30 years time, by that point onshore gas production will be in full peak and it will be paying dividends to the anti frackers pension pots. Well done to this highly regulated industry, Ironic isnt it!!

  5. Strange. I thought in the real world it was possible to insure against any eventuality. London, I thought, was employing thousands of very bright people to do just that. If that is not the case then it must be an immediate priority to de-risk and stop the maritime transport of oil and gas! That would add a few £million to the value of Third Energy-everyone’s a winner.

    I suspect there might be one or two bright persons working this very minute to market an appropriate product. Demand will produce a supply.

  6. I stand corrected Eli Goth but as Hewes62 points out, the hydrocarbon industry is managed by a govt department and the revenue from the operators is paid into the treasury. However when it comes to decommissioning it appears that the oil and gas companies are getting huge tax breaks at our expense.

    Extract from the National Audit Office
    Operators can recover some of their costs through tax reliefs. These enable operators to deduct decommissioning costs from their taxable profits and potentially claim back some taxes that they have previously paid.

    https://www.nao.org.uk/report/oil-and-gas-in-the-uk-offshore-decommissioning/

    As far as I’m aware this does not apply to onshore sites and so the government and ultimately the taxpayer is under no obligations to pay any decommissioning costs .

    • Fifi.
      Decommissioning is a business expense, similar to building a platform, running it, maintaining it and paying the onshore staff. So it is not particularly unusual, though there is some finess in the system.

      If it were not tax deductible ( ie decommissioning was not considered a legitimate business expense ) it would be something unusual in our business tax system.

      In addition the profits not taxed are either past profit taxed at the time, or profits from elsewhere in the company, as a platform being decommissioned has no revenue and therefore no profits to tax.

      I do not see that the taxpayer is funding decommissioning, rather the exchequer has had as much money as it can from the platform, and, as it was always going to be decommissioned at sometime, the gravy train has ended.

      The alternative is not decommissioning items leVe it to rot, but it is a legal requirement to remove it.

      The decommissioning itself is an activity which pays tax, so the gov can briefly benefit from the employees tax and any profits of companies involved in the activity, which do not get a tax break.

      I do not see that there is any difference onshore. IGas are on the hook to decommission Tinkers Lane, and they will no doubt look at it as a business expense.

      Of course, if decommissioning is done by a company with no revenue, then it’s done with borrowed money which is not offset against profits, or the company goes bust, in which case the taxpayer will no doubt be on the hook.

    • Fifi: like an oil operator have you ever over paid tax and been given a rebate?, same thing! Look at the huge employment, salaries and tax bill these oil and gas operators pay the treasury every year! Sure at some point they deserve a rebate, like you and me!

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