A newborn oil and gas company that four years ago bought an ageing Woodside offshore facility for a pittance, allowing the gas giant to avoid a $230 million clean-up, went into liquidation last week and Australian taxpayers may be left with the bill.
The Northern Endeavour is now moored in the Timor Sea north-west of Darwin with no crew on board and 89,000 barrels of oil in its holds.
The Federal Government has had to step in and pay an operator to maintain the vessel and keep the environment safe until it finds a long-term solution.
The facility started producing oil for Woodside and its partners in 1999 and by 2014 had shipped more than 200 million barrels of oil – worth about $16 billion at today’s prices.
However, fewer than 5000 barrels a day were dribbling into the vast tanks designed to hold 1.4 million barrels and, according to Woodside’s 2014 annual report, the company planned to stop production in late 2016.
This would have meant beginning the expensive operation of decommissioning – disposing of the vessel, cleaning up the seabed and ensuring the wells would never leak – that Woodside had priced at $230 million. A lot of money, even for Woodside, although only slightly more than $1 for every barrel of oil sold from the Northern Endeavour.
But then along came Northern Oil and Gas Australia (NOGA), a company wholly owned by a sole director, Angus Karoll, a Sydney-based entrepreneur who had found success in coal seam gas.
In August 2015 NOGA was formed, and eight months later Woodside paid the company $24 million to take over the 17-year-old Northern Endeavour, oil fields with declining production and liability for all the decommissioning costs. The Saturday Paper does not suggest any improper motive in the transaction.
Offshore oil and gas is a risky business – technically sophisticated and capital intensive. Large, experienced petroleum companies rarely hold a 100 per cent share in any one asset, instead managing risk with a diverse portfolio. When one project strikes trouble – production is down, an unexpected expensive fix is needed – cash flow from other projects can tide them over.
NOGA did things differently – small and inexperienced, it now owned 100 per cent of just one asset. That alone should have rung alarm bells for then Resources minister Josh Frydenberg. Although NOGA planned to invest in the Laminaria–Corallina oil field below the Northern Endeavour and produce well beyond Woodside’s planned 2016 shutdown date, the decommissioning bill would come eventually.
Operators normally decommission after years of eking out the last barrels of production until revenue finally drops below operating expenses, so the cost comes long after the strong cash flows have gone.
In the end, there were no good years left for the Northern Endeavour. Early in 2017, a piece of corroded steel fell from eight metres, just missing a crew member. Upstream Production Solutions (UPS), the company contracted by NOGA to operate the vessel, concluded that the worker would have died if struck by the steel.
UPS’s investigation into the incident stated that Woodside’s earlier intent to abandon the facility, instead of selling it, had in the past “led to a strategy of maintenance minimisation”. Instead of being fixed, the corroded steel had just been monitored unless it was “production critical”.
The same report, submitted to the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA), stated the crew perceived a need to disregard procedures to “expedite resumption of normal production”.
The project’s finances were tracking as well as its operations.
In August 2017, the National Offshore Petroleum Titles Administrator approved the registration of a $US20 million mortgage over the Northern Endeavour’s production licences by Castleton Commodities, a United States-based commodity trader.
Two months later, Timor Sea Oil and Gas Australia, the entity bought from Woodside and now owned by NOGA, lodged its 2015 annual report with the Australian Securities and Investments Commission, more than a year late. It revealed a $US30 million loss.
EY (formerly Ernst and Young) audited the report and noted “a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern”. Viability required all wells to produce as expected with minimal operational issues and no significant decline in the oil price.
Everything had to go right, but it did not. In 2016, the Northern Endeavour shipped just one cargo of oil. NOGA Holdings Pty Limited, the holding company of the three liquidated companies that was not itself put into administration, lost $US19 million. EY repeated its doubts about the project’s viability.
In 2017, again, there was only one oil shipment and losses grew to $US48 million, according to the NOGA Holdings report lodged in April 2019.
The same month, NOPSEMA pulled up NOGA twice. Once over not having the financial arrangements in place to deal with an oil spill and the second time over doubts about the continuation of the vital contract with UPS to operate the vessel.
Then, in July, NOPSEMA ordered the Northern Endeavour to cease production in its “current degraded state”. Shortly after, it required a backlog of maintenance to be done before production could recommence.
Karoll placed the companies in voluntary administration in September 2019 after Castleton – at that stage owed $US82 million – refused to fund further repairs, unless NOPSEMA supplied a definitive list of work to be done, according to the report of administrator KPMG.
KPMG tried to find a buyer for the whole operation and also helped Castleton’s attempts to sell the Northern Endeavour for use elsewhere. However, Castleton’s plan required the government to provide relief from the decommissioning bill. The government refused to budge. On January 21, KPMG immediately moved to wind up the companies; creditors voted for liquidation two weeks later.
The new Resources minister, Keith Pitt, announced in his first media release the establishment of a taskforce to look at long-term solutions for the Northern Endeavour. His office called its collapse an “unprecedented event in the offshore oil and gas industry in Australia”.
“It is regrettable that a commercial solution could not be found to prevent NOGA entering liquidation,” Pitt said.
A Woodside spokesperson said the transfer to NOGA was properly undertaken under Australian laws and regulations.
Pitt may well be pondering the many warning signs missed by his predecessors, Frydenberg and Matt Canavan, in administering those laws and regulations.
Woodside, through the industry lobby group Australian Petroleum Production and Exploration Association, is involved in finding a long-term solution, the Woodside spokesperson said.
“Discussions are ongoing, and it is premature to speculate on the specific issue,” they said.
“As Australia’s industry matures, there will be significantly more decommissioning activities, so it is important that the right precedents are set.”
The most significant offshore decommissioning workload ahead in Australia is ExxonMobil’s Bass Strait operations – 18 platforms and 38 pipelines, some more than 50 years old. The oil giant is understood to have halted a planned sale of its interest due to concerns from Canberra – stemming from the Northern Endeavour – that a buyer may not have the financial strength to pay for decommissioning.
The only lasting effect of NOGA’s brief four years of existence may well be the transfer of a nine-figure liability from Woodside’s shareholders to the Australian taxpayer.
The Department of Industry, Science, Energy and Resources plans to release policy options for decommissioning in the next few months.
The British government, acknowledging the oil and gas industry is in a state of flux, has decided that previous owners can be held liable for the expensive decommissioning of the country’s offshore wells if there is a default, even after they are sold.
This article was first published in the print edition of The Saturday Paper on February 15, 2020 as "All at sea".
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