Planning for Energy Infrastructure Removal: Tips for Landowners

Unused oil and gas infrastructure is quickly becoming an intergenerational burden. Advance preparation from landowners can help expediate the process.

Amid the ongoing energy transition, unused energy infrastructure is increasingly becoming an intergenerational burden, with benefits from energy production incurred by prior generations and legacy infrastructure issues left for the present and future generations to resolve. The current rebound in energy prices that incentivizes remaining hydrocarbon recovery will be only a temporary salve.

Legacy energy infrastructure is fast becoming a socialized cost in the form of public nuisance and a federal budget line item under the Infrastructure Investment and Jobs Act and perhaps at some point will be considered a part of the frontloaded cost of the energy transition.

To reduce liabilities while preserving these assets’ benefits, landowners need to estimate the cost of removal while infrastructure is still in service, negotiate amicable financial assurance agreements (FAAs) with existing operators, and put in place an action plan that accounts for operator incentives to delay decommissioning after an asset’s end-of-field life.

The Need for Financial Assurance Agreements

In the context of upstream oil and gas, asset retirement obligations (AROs) are liabilities project operators and working interest owners (WIOs) incur—in the form of commitments to landowners—to dismantle and remove infrastructure and restore property (DR&R) or pay an equivalent amount to the landowner.

 

 

The landowners derive value from the development on their land through royalties and lease payments but also incur credit risk associated with the cost of infrastructure removal.

This credit risk generally increases as AROs approach maturity and asset values diminish amid declining reserves—unless this credit risk is offset by financial assurance tools.

These tools are broadly summarized below and can be enforced through regulations or negotiated agreements:

Type	Measure	Tools
Company specific	Operator or WIO’s financial capacity or credit rating	Parent or affiliate guarantee
Asset specific	Asset value or value of reserves over time	Surety bonds, sinking funds
Hybrid	Operator or WIO’s financial capacity and asset value	Surety bonds or sinking funds to supplement corporate guarantee

Even with adequate FAAs and going-concern operators, however, enforcing infrastructure removal at the end of production can be a challenge, as operators have a significant incentive to delay decommissioning to save capital or consider alternative uses.

Case in point: an oil platform in Alaska remains standing despite not having been in use for thirty years. Ocean protection advocates say it could present environmental hazards, while WIOs are striving to delay DR&R. In October 2023, state regulators gave the WIOs five more years to draft plans to repurpose this infrastructure.