Renewables sector learning from messy failures after oil company collapses with $200m clean up bill

A small oil and gas company in Western Australia has collapsed under the weight of $200 million in decommissioning costs, and renewables experts are paying close attention.

ASX-listed Pilot Energy has brought in administrators after failing to secure the funding or partners it needed to turn an old oil and gas field into a carbon capture and storage reservoir.

Not only is the carbon capture plan now unlikely, but the full impost of the clean up is likely to be paid by the rest of the offshore oil and gas industry.

A report by engineering consultancy Xodus last year estimated the cost of decommissioning in the Perth Basin, where Cliff Head is the only field, at $200 million. 

Francis Norman, the head of the Centre Of Decommissioning Australia (CODA), expects the federal government will likely extend the current industry-wide levy imposed on the whole industry to cover the cost of cleaning up the Northern Endeavour offshore gas facility, after its owner collapsed.

“I don’t honestly think it is reflective of the broader industry, these are outliers,” he told Renew Economy, but it’s a teachable moment for new energy industries.

“This is part of the learnings that we’ve got as an evolving industry in Australia, that we need the regulatory agencies, the governments that have oversight of these need to be increasingly vigilant that the companies operating these have the financial wherewithal to meet their obligations.”

Triangle Energy offloaded the defunct asset to the smaller company last year, but it too only recorded $12 million in current assets at the end of last year and like Pilot, has no revenue.

Neither company factored decommissioning costs into their public financial statements.

Wilderness Society corporate campaigner Amanda Holly says it’s another example of bigger companies “cutting and running.”

“As an oil field stops producing, the classic thing is they will offload it to a smaller company,” Holly told Renew Economy.

“We’re proposing that it’s the industry’s responsibility to pay for it. We’re proposing right now that any oil and gas company that has an offshore asset is made to put forward a bond so that there is money set aside.”

After the owner of the Northern Endeavour facility collapsed, the federal government changed the law so clean up expenses also fall on previous permit holders.

But new financial assurance reforms, to ensure the public doesn’t pay the $60 billion worth of offshore decommissioning over the next 30-50 years, have been stuck on the desk of federal resources minister Madeleine King since January. 

Onshore coal and oil and gas projects already need to pay bonds to cover rehabilitation, although last month Queensland treasurer David Janetzki said the state was reconsidering the fee for smaller mine owners and explorers as part of a “cutting red tape” exercise.

Worse case scenario

Taxpayers or landowners being faced with a clean up bill is a worst case scenario for the renewables sector, but public oil and gas failures such as Pilot Energy are not building confidence in decommissioning generally. 

The risk of a wind, solar or battery owner falling over and forcing decommissioning costs onto the landowner host are a popular tool among anti-renewables groups to raise community angst.

Renew Economy regularly sees this issue in state planning submissions and in online community groups. 

Earlier this year, Gannawarra Shire mayor Garner Smith expressed fears to Renew Economy that renewables companies would do exactly what is happening in oil and gas.

“If it’s owned by a $2 shell company in the Cayman Islands, and they just say, well we’re just walking away. What does a farmer do?” he said.

“I know farmers are getting advice from lawyers that everything’s okay because it says in here this is the way it’ll happen. Well, if it does happen that way, it is okay. But there’s a distinct possibility it won’t. And farmers do not have the capacity to decommission these things.”

The fear of landowners being left with the clean up cost was reinforced by New South Wales (NSW) premier Chris Minns telling a radio interviewer last year that, “If the company closes down, then it’s the landholder’s obligation to clean up the site.”

Learning from fossil fails

Norman recommends the renewable energy industry look to putting safeguards in place against the risk of a future Pilot Energy or Northern Endeavour situation happening.

“That could be a bond of some kind, it could be they put money into an escrow account, it could be that the government charges an annual fee, a licence if you like, and that provides a kind of government level of insurance,” he says.

“Where I think this is particularly challenging though in the onshore renewable energy space, is often the companies developing these are low margin businesses, low capital businesses, and they very well may not be there when a wind turbine has to be taken down or a solar farm reaches the end of its life.

“Responsibility for clean up should not fall for the landowners, or broader society.”

Re-Alliance policy director Megan Kessler says the latest oil and gas collapse, as well as those landowner fears held by the likes of Garner and his constituents, are exactly why good systems have to be in place now.

“We looked into this issue because we were hearing from landowners that is was potentially preventing them from getting involved,” she told Renew Economy.

“At this point, we’re not seeing decommissiong at scale for large scale renewables, we’re not seeing major problems, but we want to have the system in place before we have that so landowners have that confidence it will be taken care of.

“People are aware of what is happening in the oil and gas industry and we want to make sure it doesn’t happen in renewables in the future.”

The renewables sector is learning from the messy failures of the fossil fuel industry.

The Queensland and national clean energy councils last year put forward a model that ring-fenced decommissioning funds that stayed with the project, not the owner. 

They pitched options including a bank guarantee, cash in escrow, or a surety bond which is paid over time, to be led by governments, which currently handle end-of-life financial guarantees for fossil fuel projects.

That idea was adopted by Vicgrid in its new community guidelines, which suggest developers “must include financial safeguards (bonds, trust arrangements) where appropriate”.

The guidelines also hint at work happening at a national level to nut out how decommissioning should happen.

Kessler says trailing liabilities, as is used in the oil and gas sector, would be a good idea for existing renewables projects as these put the clean up costs back on parent companies if the local subsidiary fails.

But bonds aren’t everyone’s favoured way to allay the risk to landowners.

Last year, in New South Wales (NSW), the Liberals put forward a motion to make renewable energy companies pay a 50 per cent “decommissioning” deposit before they can start building projects.

The reform was shot down by state energy minister Penny Sharpe, who said it would cost an estimated $1.4 billion just for the projects that are coming on line until 2030.

“A tax sitting in a government bank account without building a single project will push up the costs of replacing ageing coal-fired power stations, make bills more expensive and deliver no new electricity to the grid,” she said during question time in September.

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