Comparative analysis of financial assurance instruments for oil and gas decommissioning and mine restoration
PETROVIETNAM
PETROVIETNAM JOURNAL
Volume 6/2021, pp. 43 - 54
ISSN 2615-9902
COMPARATIVE ANALYSIS OF FINANCIAL ASSURANCE
INSTRUMENTS FOR OIL AND GAS DECOMMISSIONING AND
MINE RESTORATION
Le Thi Huyen
Petrovietnam University
Email: huyenlt@pvu.edu.vn
Summary
This paper introduces how different bonding mechanisms for oil and gas decommissioning and mine restoration can ensure operators’
accomplishment of restoration/decommissioning liability and affect their budget. Four mechanisms presented and compared herein
include surety bonds, cash collateral bonds, decommissioning and abandonment provisions, and lease-specific abandonment accounts.
The author also provides some cautions and recommends amendments for each mechanism to be efficiently applied to oil and gas
decommissioning in Vietnam so as to assure operators’decommissioning duties without discouraging their potential investments.
Key words: Financial assurance, bonding mechanisms, decommissioning, restoration.
1. Introduction
Inanoilandgasoraminingproject,decommissioning1
how they affect the operator’s budget, and (iii) which
type of bond instruments is most effective in ensuring the
operator’s compliance without highly discouraging their
investment?
or restoration2 occurs at the closure phase3 when
extraction or production operations terminate. Since
no more revenues are created, financial assurance
mechanisms aim to provide adequate funds for such
work [2]. Lessons show that there are many cases where
unplanned and premature closures occurred [4] and
financial assurance is particularly helpful in such cases,
whether in the mining industry or the oil and gas industry
[5, 6].Therefore, selecting a financial assurance mechanism
or a bonding approach that can ensure full restoration or
decommissioning is crucial to the regulator. Meanwhile,
given that bonds can restrict the operator’s operating
capital which reduces when the deposit amount is high [7],
choosing a bond instrument that does not discourage the
operator’s investment and simultaneously assures their
compliance is not less critical to any regulator. Given such
context, this paper aims to address three key questions:
(i) how different types of bond instruments guarantee
fulfillment of restoration/decommissioning liability, (ii)
Vietnam has a great potential of oil and gas resources.
In 2017, Vietnam’s crude oil reserves were 4.4 billion
barrels, ranking third in Asia, after China and India and
could be enhanced in the future since the country’s waters
were largely unexplored [8]. However, as in other regions,
many offshore oil and gas fields in Vietnam are reaching
the end of their productive lives [9, 10] and hence will be
decommissioned soon. In addition, any offshore platforms
will be eventually decommissioned. Therefore, timely
amendment for improvement of Vietnam’s legislation on
oil and gas decommissioning to be applied to existing
projects and new ones is critical. With recommendations
for Vietnam’s relevant legislation, this research contributes
to ensuring sufficient financial guarantee funds for full oil
1 The research uses the term “decommissioning” to refer to the process that contains all activities
related to removing and disposing offshore platforms [1].
2The research uses the term “restoration” to refer to the activities that repair mined land and are
undertaken after mining operations (extraction) cease as part of the mining project.
3The life cycle of a mine comprises eight phases: design, exploration, permitting, construction,
operations, decommissioning/closure, post-closure and relinquishment [2]. Likewise, an oil and gas
project life consists of six phases which are lease, exploration, development, production, closure and
post-closure [3].
Date of receipt: 2/7/2020. Date of review and editing: 2 - 29/7/2020.
Date of approval: 11/6/2021.
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and gas decommissioning throughout the project life
without discouraging operators’investments.
abandonment provisions), or the form of an account
within a specified period (lease-specific abandonment
accounts) [1, 5, 11, 14]. The followings are an overview of
these financial assurance instruments.
2. Methods
This research is the continuation of the study of
Ferreira and Suslick [1, 5, 11-13] regarding different
bonding regimes for offshore decommissioning. Ferreira
and his colleagues focused on evaluating the effects
of alternative bond options on the operator’s net
present value (or payoff) and the government earnings
in hypothetical oil-producing projects in the Brazilian
Continental Shelf [5]. Whereas this research focuses on
the extent to which different bond approaches can assure
full decommissioning or restoration work to be delivered
without discouraging the operator’s investment. This
research also differs from Ferreira and Suslick’s study
in terms of methodological approach. Ferreira and
Suslick applied a financial valuation model for bonding
approaches based on discounted cash flow and sensitivity
analyses for the hypothetical oil-producing projects [5].
Differently, this research compares different bonding
mechanisms as specified in Vietnam’s legislation, Ferreira
and Suslick’s scenarios, and the literature. The effects
of some bonding mechanisms on operators and the
government are contextualised in oil field X in Vietnam
and three opencast coal mines in East Ayrshire, Scotland.
3.1. Surety bonds
In the context of the mining industry and the oil
and gas industry, surety bonds are agreements among
three parties: the operator who is required to undertake
site restoration/decommissioning as approved by the
government, the government who must ensure the
accomplishment of restoration/decommissioning work
and a surety company who guarantees the availability of
funds for restoration/decommissioning work irrespective
of the operator’s financial capacity [7, 15]. Surety bonds
have been favoured by a number of mining companies
because of the relatively small payments required [16].
Since the surety company’s responsibility is limited
to the insured amount, the bond value may not fully
cover the decommissioning cost [15]. In addition, surety
bonds are maintained by operators’ annual premiums
[1] which are not aimed to pay for losses to the same
level as traditional insurance premiums because in fact,
a great amount of the premiums for surety bonds are
underwriting fees [15]. Furthermore, unlike insurance
policies, of which premiums are calculated to cover
anticipated payments, surety bonds are issued based on
credit worthiness principles: If there is higher financial
uncertainty given the operator’s reputation, the surety
issuer may charge a higher premium [7]. Then it is
important that the government must precisely calculate
the bond value and strictly monitor it during the project
life to ensure its sufficiency for the entire restoration/
decommissioning work. Another problem is that if the
operator goes into liquidation, the surety company may
not have to pay out the whole value of the bond, but they
will never have responsibility for the exceeding value [15].
Therefore, effective negotiations with surety company
are essential for the government’s success in securing the
whole bond value.
Four types of data were collected for the research,
comprising documentation, two informal conversations
and a telephone conversation. Data about oil field X was
collected between March 2019 and July 2020. Whereas
data about three opencast coal mines in East Ayrshire,
Scotland, were collected from March 2016 to April 2018
as part of the data for the author’s PhD study and all such
data were documented.
3. Overview of bonding mechanisms
Liability risks can be decreased by bonding
mechanisms in respect of: (i) creating impetus for
complying with contract requirements; (ii) indemnifying
the government and taxpayers sensibly from failure;
and (iii) providing environmental protection against
possible damages due to not implementing appropriate
closure activities [13]. Bonding mechanisms can be in
the form similar to insurance policies (surety bonds),
the form of an upfront fund that covers full restoration/
decommissioning costs at the project approval stage
(cash collateral bonds), the form of fund paid in annual
portions during the project life (decommissioning and
3.2. Cash collateral bonds
Cash collateral bonds can be in the form of letters of
credit, certificates of deposit, cash or real property and
are the least preferred option for mining companies since
they require huge expenditures [16]. In this mechanism,
an amount of cash equivalent to the whole restoration/
decommissioning cost is deposited upfront with a
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governmental agency or to an insured bank account [1,
14]. The interest earned from the account is either added
to the bond value or returned to the operator [14]. The
operator is not allowed to utilise the deposited cash to
undertake the required work and can only receive it back
when the work completes [1].
abandonmentprovisions,thelease-specificabandonment
account approach requires the operator to pay the
decommissioning cost within four years since production
or by the start of the year when the operator is expected
to have produced 80% of the economically recoverable
reserves, whichever is earlier; the first payment is
equivalent to 50% of the total bond value [5, 12]. This
approach only applies to the field’s producing life [12]. Like
cash collateral bonds, this mechanism requires operators
to use out-of-pocket funds to cover decommissioning
activities and the deposited cash is only returned to
operators upon completion of the required activities
[5]. Similar to the decommissioning and abandonment
provisions, the literature review does not show whether
this approach has been utilised in the mining industry;
however, it can have similar application.
3.3. Decommissioning and abandonment provisions
Under the decommissioning and abandonment
provision mechanism, the total decommissioning cost is
paid by the operator in annual portions throughout the
field’s life cycle or producing life [1, 17, 18]. Different from
cashcollateralbonds, thefundcollectedinthismechanism
can be used by the operator to implement the required
work [1]. As the name suggests, this mechanism is used
in the oil and gas industry and although its application to
the mining industry has not been found in the literature,
it can be understood similarly.
4. Results
4.1 Surety bonds
3.4. Lease-specific abandonment accounts
Surety bonds are more advantageous to operators
than cash collateral bonds in the aspect that the operators
Different
from
the
decommissioning
and
Figure 1. Restoration Plan B for Duncanziemere complex in 2014 [29].
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do not have to pay for a large upfront fund [1]; if being
calculated precisely and monitored strictly, they are more
beneficial to regulators than the decommissioning and
abandonment provisions because if the operators go
bankrupt at some point in the project life, the regulators
will be paid by the surety company for full restoration/
decommissioning work. Experience from Dunstonhill
Surface Mine (Dunstonhill), Duncanziemere Surface
Mine (Duncanziemere) and Netherton Surface Mine
(Netherton) - three opencast coal mines in East Ayrshire,
Scotland, showed that calculating and monitoring surety
bonds are critical.
work [27]. Especially, the Council’s lack of monitoring led
to the bond for Duncanziemere having expired without
being replaced by Aardvark [28] and it became unsecured
due to not having been called in by the Council before its
expiry [29].
The cases of Dunstonhill and Netherton also showed
negotiations with bond providers are crucial for securing
bond values. After the liquidation of Scottish Coal and
Aardvark, East Ayrshire Council had a lot of challenges in
this regard. In relation to Netherton, the bond provider
made the final offer of GBP 3.96 million, equivalent to 88%
of the maximum value of the bond after some negotiations
with the Council [30]. Regarding Dunstonhill, given the
potential decreases of the restoration bond values, the
Council managed to call in the bond prior to the expiry
dates [31]. The first bond call was repudiated by the bond
provider who, after the second call, only agreed to present
a cumulative offer of GBP 6 million for Dunstonhill and
Ponesk (another opencast coal site in East Ayrshire - the
author) [32, 33]. This means the original bond value for
Dunstonhill was reduced by GBP 1.2 million.
Dunstonhill, Duncanziemere and Netherton were
operated by Scottish Coal (Dunstonhill) and Aardvark
(Duncanziemere and Netherton) after being granted
planning permissions on 29 March 2010, 30 March 2011
and 19 October 2010 respectively [19 - 21]. Nevertheless,
Scottish Coal went into liquidation on 19 April 2013 and
the same situation happened to Aardvark on 16 May
2013 [22]. In order to be granted planning permissions
for the sites, the mining companies were required to
lodge restoration and aftercare bonds at the planning
stage to ensure fulfilment of the restoration and aftercare
obligations as specified in the Section 75 Agreements
[20 - 22]. Those restoration and aftercare bonds are
surety bonds [23 - 26]. Dunstonhill was provided with
a restoration bond valued at GBP 4.2 million and an
aftercare bond worth GBP 0.377 million [22] whereas
Duncanziemere and Netherton were granted restoration
bonds of GBP 2.6 million and GBP 4.5 million respectively
[21, 22]. However, at the time of the operators’liquidation,
the estimated costs for restoring the sites according to the
original restoration plans would be GBP 10.241 million,
GBP 6.593 million, and GBP 11.811 million respectively
[22]. Those wide gaps between the bond values and the
restoration costs were caused by East Ayrshire Council’s
failures in calculating and monitoring the bonds at the
planning stage and during the operations phase [27].
For example, the schedule of restoration and aftercare
liabilities for Dunstonhill related the bond quantum
to specific time periods [23]. However, no compliance
monitoring was executed after the signing of the Section
75 Agreement, particularly by an independent mining
engineer (who should be appointed by the Council) to
guarantee the operational and restoration works on site
were pursuant to the approved scheme and hence could
make any necessary adjustment to the bond quantum
for sufficient coverage of the outstanding restoration
4.2 Decommissioning and abandonment provisions
The financial assurance instrument currently applied
to the oil and gas industry in Vietnam can be categorised
as decommissioning and abandonment provision.
Particularly, oil operators in Vietnam shall, within one year
since the production of the first oil and gas flow, establish
a financial guarantee fund to which annual payments
shall be made according to the previous formula:
The production within the year
× (Total decommissioning cost
– The paid balance)
[34]
Payment level =
Remaining recoverable reserves
or the present formula:
̻ × (̼ − ̽
− ̓
)
͢
͢
(͢ - 1)
(͢ - 1)
̿ =
͢
̾
͢
in which:
- En: The level of payment in the year n; the calcula-
tion unit is USD.
- An: The production in the year n, defined by the ac-
tual production in the respective year; the calculation unit
is barrel of oil equivalent.
- Bn: The total decommissioning cost updated in the
year n, Bn = (b1 - b2), in which:
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+ b1: The total decommissioning cost estimated in
the (most recently approved) decommissioning plan; the
calculation unit is USD.
transfer part of the fund to the operator for undertaking
decommissioning activities if being called during the
project life [35]. If the decommissioning work is not
implemented wholly or partially by the operator, PVN can
use the fund for fulfilling the work [34, 35].
+ b2: The cost estimate defined in the (most recently
approved) decommissioning plan corresponding to the
equipment, property or structure decommissioned up to
the year (n-1); the calculation unit is USD.
4.3 Cash collateral bonds
Compared to surety bonds and decommissioning and
abandonment provisions, cash collateral bonds are likely
the most reliable approach to ensure full restoration/
decommissioning work to be undertaken. This is because
operatorshavetodepositanamountofmoneyequaltofull
restoration/decommissioning cost in an escrow account
in advance and the government completely controls such
account until the bond is released after the completion of
the required operations [1]. This was probably the reason
why East Ayrshire Council chose this bonding approach
for Duncanziemere after the liquidation of the previous
operator. Particularly, the Council approved another
mining company to extract the remaining coal and
restore the site to a revised restoration plan but required
such mining company to deposit in advance a sufficient
amount of money into an escrow account which would be
used if they did not fulfil the task [29].
- C(n-1): The balance of the financial guarantee fund
on December 31st of the year (n-1), defined by the total
balance of all the bank accounts to which PVN sends the
financial guarantee fund of the respective field, and certi-
fied in writing by the relevant commercial banks; the cal-
culation unit is USD.
- I(n-1): The profit from the savings accounts received
by organisations and individuals after PVN, on behalf of
them, fulfils all the duties to the national budget (if any)
for the year (n-1).
- Dn: The remaining recoverable reserves, Dn = d1 - d2,
in which:
+ d1: The recoverable reserves defined in the
economic development plan or the early production plan
already approved by authorities up to the end of the year
n; the calculation unit is barrel of oil equivalent.
However, the problem of cash collateral bonds
is that the operators have to pay in advance (prior to
extraction/production) for an upfront fund which covers
the whole restoration/decommissioning work and cannot
be used by the operators for implementing restoration/
decommissioning activities. This means the operators
must pay double for restoration/decommissioning
activities during the project life, which requires large
capital and is not attractive to investors. Investments from
large companies like mining ones are important for the
local and regional areas. For example, the development
at Dunstonhill would create totally 276 jobs including
indirect jobs through offering or retaining about 120 jobs
for directly employed staff and continuing support for
local businesses [36]. The development at Duncanziemere
would provide 36 jobs and sustain indirect employment
in supplying mechanical, engineering and fleet services to
opencast sites [37]. Meanwhile, Netherton would provide
or retain about 110 direct jobs [38] and support indirect
employment for local subcontractors, trades and small
businesses related to the site operations and coal haulage
[40]. In fact, all the mines are located in rural areas where
the unemployment rates were high [37, 38, 40 - 42] and
most of the employees were expected to reside within
+ d2: The total production accumulated from the
relevant field(s) up to the year (n-1); the calculation unit is
barrel of oil equivalent [35].
Following the above-mentioned formulas, operators
only deposit in the financial guarantee fund part of the
decommissioning cost during the project life. This could
lead to financial burdens on taxpayers if the operators go
into liquidation [1]. Therefore, the mechanism does not
ensure the compliance [1] as the operators may choose
to liquidate at some point of the project to avoid the
remaining financial liability if the field production does
not compensate for the decommissioning cost.
Slightly different from the Brazilian hypothetical
cases where no interest would be earned from the fund
[1], pursuant to Vietnam’s legislation, interest will be
earned and added to the fund after all financial duties
to the Government of Vietnam have been fulfilled
[34, 35]. This helps reduce the financial burden on
the operator as their actual total payment is less than
the total decommissioning cost. Particularly, PVN will
deposit the fund in a separate interest-bearing account
in a stable credit institution in Vietnam [34, 35]. PVN will
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15 kilometres of the site or within East Ayrshire [36, 37,
39]. Therefore, such job provision was considered to
contribute substantially to the local economies [37, 38,
43, 44]. Likewise, the oil and gas industry can play an
important role in the economic development of a region
or even a nation. Tremendous investment activities in oil
and gas exploration and production have madeVungTau -
the oil and gas hub of Vietnam - become a prosperous city
and contribute significantly to the nation’s economy [45].
Between 2006 and 2015, PVN made an average annual
contribution of 20 - 25% of the total national budget and
18 - 25% of the GDP [46]. Since 2015, despite facing many
difficulties, PVN has still contributed about 9 - 11% of the
total national budget and 10 - 13% of the GDP annually
[46].
the decommissioning and abandonment provision and
surety bond options, it is less advantageous. If the project
lasts 10 years, their annual payments to the fund are
spread over the project life in the former and thus the
total payment within 4 years is much less than the total
decommissioning cost; whereas their annual premiums
for 4 years to maintain the bond in the latter are even
much lower than the total decommissioning cost4.
5. Discussion
Given the problems associated with surety bonds, the
author does not recommend this approach to oil and gas
decommissioning in Vietnam. Surety bonds only serve as
a form of financial guarantee and operators still have to
pay for their restoration/decommissioning activities on
their own [1]. If the operator is solvent to complete the
task, the bond will be released and the premium payment
will be terminated. On the contrary, the bond issuer will
finance restoration/decommissioning activities [1]. This
explains firms’ choice of going into liquidation when
seeing that they would not be able to produce adequate
profits to fund the required work like the cases of Scottish
Coal and Aardvark in East Ayrshire, Scotland in 2013. In
addition, the bond issuer will not have to pay the whole
bond value and the experiences in East Ayrshire show that
negotiations with bond issuers to reclaim the maximum
bond value is very challenging.
4.4 Lease-specific abandonment accounts
Another approach mentioned by Ferreira and Suslick
[5] that has not been applied in the oil and gas industry
in Vietnam and the mining industry in Scotland is lease-
specific abandonment account. This approach seems to
be beneficial to both regulators and operators.
For regulators, it is assured that, by the end of the
maximum 4-year period since production, they have held
the fund that can cover all required decommissioning
activities. It is safer than the decommissioning and
abandonment provision approach if the production lasts
more than 4 years and much safer than surety bonds
though a bit riskier than cash collateral bonds. Although
there may be cases where the operator is insolvent before
the fourth year, the regulator is assured to have held at
least half of the total decommissioning cost from the
initial payment, which, following Vietnam’s legislation,
must be fulfilled within one year since the first oil and gas
production [34, 35] instead of an undefined date within
4-year time in the Brazilian hypothetical context [5].
Again, this approach is safer than the decommissioning
and abandonment provision if the production lasts more
than 2 years, much safer than surety bonds and safe by
half of the cash collateral bond mechanism.
The cases of opencast coal mines in East Ayrshire
also showed what mining companies would do to avoid
restoration liabilities. After the liquidation of Aardvark,
two companies namely OCCW (Duncanziemere) Limited
and OCCW (Netherton) Limited, which were actually
hived down from the interest of Aardvark, were set up
to continue coaling operations at Duncanziemere and
Netherton and undertake the remaining restoration
liabilities [47]. It should be noted that these liabilities
addressed the revised restoration schemes only, which
are at lower levels than the original ones [21, 29]. The
situation seems to be similar in the oil and gas industry
because small spurious firms can be set up from big
ones to circumvent decommissioning obligations if no
stringent financial guarantee regime is in place [5].
For operators, this mechanism is more advantageous
than the cash collateral bond approach in the aspect
that their initial payment does not have to cover the
whole decommissioning cost. However, compared to
As
aforementioned,
the
decommissioning
and abandonment provision approach has been
4This comparison only considers annual premiums of which the rates in the offshore surety industry are often between 1 and 3% but can be up to 5% of the covered loss [15]. There might be cases where opera-
tors also have to collateralise 100% of the bond to keep the bond in place [15].
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applied to decommissioning of oil and gas projects
in Vietnam. This approach is more advantageous to
operators than cash collateral bonds and lease-specific
abandonment accounts in the aspect that they can pay
the decommissioning fund in annual portions over the
project’s or the field’s lifetime. For regulators, while this
approach can avoid the issues associated with securing
bond money if the operators go into liquidation under the
surety bond option, it does not ensure compliance of full
financial liability until the end of the project as mentioned
earlier. In the case of oil field X developed by Truong Son
Joint Operating Company (Truong Son JOC) from 24
November 2008 and then by Petrovietnam Exploration
Production Corporation (PVEP) since 24 November
2013 [48, 49], the financial liability was entirely fulfilled
by the previous operator. Particularly, Truong Son JOC,
before handing over the field in 2013, had revaluated the
financial guarantee fund and added to the fund to ensure
its adequacy for decommissioning operations, given
the early cessation of the Production Sharing Contract5.
Doing this way, Truong Son JOC complied with Article 20
of Decision 40/2007/QD-TTg which requires that within
one year before the end of the petroleum contract or the
expiry of the petroleum production period, operators
must recalculate the financial guarantee fund and must
add to the fund if it is not sufficient for decommissioning
[34]. While in Vietnam so far there have never been cases
of oil companies liquidating to avoid decommissioning
liability and apart from laws, there would be contractual
terms binding operators’ liability, the potential deficiency
of decommissioning funds during the project life under
this bonding mechanism should be paid attention to
by Vietnamese regulators. Additionally, since the fund
deposited by the operator during the project life will be
managed by PVN [34, 35], administrative issues will arise
and need to be handled by the Group diligently.
unnecessaryorunusedforfuturepetroleumactivitiesmust
be decommissioned within this phase and the operators
do not have to pay for a financial guarantee fund in such
cases [35]. In addition, requiring the operators to pay for
the financial guarantee fund within one year since the first
oil and gas production is more attractive to investors since
it gives them more time to accumulate profits from the
project. However, there is a risk of noncompliance if the
operators liquidate just within this period.
Similar to the decommissioning and abandonment
provisions, if the cash collateral bond approach is applied
to oil and gas decommissioning in Vietnam, it can be
amended such that the upfront funds can be used by
the operators to implement decommissioning activities
during the project life upon calling PVN. Moreover, interest
earnings from the upfront fund should be returned to the
operator annually like in the Brazilian cases [1] to support
its capital needs. These help reduce financial burdens
on the operator and thus also attract more investment.
Again, since the upfront fund will be managed by PVN
in Vietnamese cases [34, 35], administrative issues will
arise and need to be resolved diligently by the Group.
Furthermore, compliance monitoring must be undertaken
stringently by the Government in collaboration with PVN
to ensure the money withdrawn from the upfront fund
equates to the decommissioning work caried out by the
operator on site.
Whereas, likecashcollateralbonds, ifthelease-specific
abandonment account approach is applied to oil and gas
decommissioning in Vietnam, it can be amended so as the
money in the account can be utilised by the operator to
undertake the decommissioning work during the project
process upon calling PVN. Also, interest earnings from the
account can be returned to the operator yearly like in the
Brazilian cases [5] to support its capital needs. These will
also help attract more investment from the operators.
Again, similar to the decommissioning and abandonment
provision and cash collateral bond options, the account
will be managed by PVN in Vietnamese cases [34, 35],
therefore, the Group needs to be diligent in dealing
with administrative issues arising. Also, the Government
in collaboration with PVN must have strict compliance
monitoring to make sure the money withdrawn from the
account corresponding to the decommissioning work
implemented by the operator on site.
Regarding cash collateral bonds, while the upfront
fund shall be paid by the operator prior to coal extraction
or oil and gas production as in the Scottish and Brazilian
cases respectively, it can be paid within one year since
the production of the first oil and gas flow following
Vietnam’s legislation for the timing of establishing the
financial guarantee fund [34, 35]. This is quite sensible
to regulators because under the current law, projects
which are determined during the exploration phase to be
5The production of the field X should have been ceased when Truong Son JOC terminated the Production Sharing Contract; however, PVEP, on behalf of PVN which was assigned by the Government of Vietnam,
continued the operations of the field in order to maximise the oil extraction and thus does not have financial liability for the field decommissioning.
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Figure 2. Large flooded hole with steep wall at Dunstonhill opencast coal mine in April 2013 after being abandoned.
So how about the existing oil and gas projects in
Vietnam that have been operated for more than 10 or
20 years? Since the decommissioning and abandonment
provision approach has been applied to them, the
government in collaboration with PVN needs to check
the balance of the financial guarantee fund for each
project and monitors the site to assess the outstanding
decommissioning liability. If the fund is inadequate for
undertaking the outstanding work, the operator must
add to the fund immediately or as soon as possible.
This is especially important for projects executed via
joint ventures or production sharing contracts between
PVN and international firms since the latter may go into
liquidation at any time. It is not only reasonable but also
fair because the projects have lasted more than 10 or 20
years, bringing certain profits to the operators from oil
sales.
6. Conclusions
The comparison of different bonding instruments
with practices from the oil and gas industry in Vietnam
and the opencast coal mining industry in Scotland shows
the outbalance of each instrument to the government
and the operators.
Cash collateral bonds are most advantageous to the
government since they ensure the site is fully restored
or decommissioned. Contrarily, this option is least
advantageous to operators who have to make double
payment for the restoration/decommissioning cost
during the project life.
The second choice for the government should be the
lease-specific abandonment account option because by
the end of the fourth year, the government will have held
the fund that can cover the total decommissioning cost.
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For the operator, lease-specific abandonment accounts
are more favourable than cash collateral bonds because
the initial payment is equivalent to only half of the
restoration/decommissioning cost.
the decommissioning and abandonment provision
approach.
If the afore-mentioned bond instruments are applied
to oil and gas decommissioning in Vietnam, some
amendments need to be considered. Cash collateral
bonds and lease-specific abandonment accounts will
become more advantageous to the operator if the
upfront fund in the former and the money in the account
in the latter can be used by the operator to carry out
decommissioning activities during the project and any
interest earnings can be returned to the operator annually
to support its capital needs. In addition, the upfront fund
for cash collateral bonds and the initial payment for
lease-specific abandonment accounts can be deposited
within one year since the production of the first oil and
gas. Regarding the decommissioning and abandonment
provision approach which has been applied to oil and gas
decommissioning in Vietnam, the Government should be
cautious of the potential deficiency of decommissioning
funds if operators go into liquidation at some point within
the project life. For all those types of bond instruments,
the Government in collaboration with PVN needs to
monitor operators’ compliance stringently to ensure the
money withdrawn from the financial guarantee fund
is equivalent to the decommissioning work execution.
Furthermore, as the manager of the financial guarantee
fund, PVN needs to deal with any arising administrative
issues diligently.
The third desirable option for the government should
be decommissioning and abandonment provisions.
Getting annual moneys until the year when the operator
goes in liquidation (if this is the case), it is more reliable
for the government than the surety bond option in which
they need to calculate the bond quantum precisely
and monitor carefully throughout the project phases to
ensure the bond money is adequate for the remaining
restoration/decommissioning liability. The operator
is more advantageous with this option than with the
cash collateral bonds and lease-specific abandonment
accounts since they can pay the decommissioning fund
in annual portions over the whole project life or the field’s
producing life.
Among the four options, surety bonds are least
reliable to the government due to issues associated with
bond securing while the operator may not undertake
the required restoration/decommissioning during the
project life and go into liquidation near the end of
the project to avoid using their out-of-pocket funds in
addition to the annual premiums to maintain the bond to
cover restoration/decommissioning activities. However,
if the government is successful in bond securing, they are
more advantageous than under the decommissioning
and abandonment provision approach due to being
paid by the surety company for the exact outstanding
restoration/decommissioning liability in case the
operator becomes insolvent at some point of the project
life. On the contrary, the operator is most advantageous
under this approach. Clearly, with this approach,
the operator does not have to pay either an upfront
fund equal to the total restoration/decommissioning
cost like with the cash collateral bonds or payments
equating to the total restoration/decommissioning cost
within four years or an initial payment equivalent to
half of the restoration/decommissioning cost like with
the lease-specific abandonment accounts. If the project
lasts more than 10 years and the operator chooses
to liquidate just after the fourth year of production/
extraction, the annual premiums to keep the bond in
place within four years are much lower than the annual
payments out of the total restoration/decommissioning
cost and thus the operator is more beneficial than with
Acknowledgement
This work was funded by Petrovietnam University
under grant code GV1903.
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