In either case, the Ministry of Petroleum and Energy (MPE) has signalled that it will introduce a new practise for approval of corporate transactions, whereby sellers will remain secondary liable for decommissioning costs after completion. This newsletter from Thommessen's oil & gas team addresses our understanding to date of this new practice and the implications sellers and buyers on the NCS need to be aware of. 

Secondary decommissioning liability in corporate transactions - change of practice

Much uncertainty and debate has followed in the wake of MPE's letter to the Norwegian Oil and Gas Association in November last year, in which MPE informed the Norwegian oil and gas industry that it would consider imposing a requirement that the seller of shares (directly or indirectly) in a company holding licences on the NCS remains secondary liable for the company's decommissioning cost as a condition for approval of corporate transactions going forward.

MPE stated in the mentioned letter that the requirement would be based on the principles which already apply for asset transactions (sale and purchase of participating interests in production licences), whereby the seller according to the Petroleum Act remains secondary liable on a post-tax basis for costs (i.e. for 22% of the costs) associated with decommissioning responsibilities related to installations which exist at the time of completion of a transaction.

Critics have claimed that a secondary liability for sellers in corporate transactions will negatively affect the transaction market on the NCS, and that MPE is using the wrong tool in its pursuit of comfort that there will be oil companies available to pick up decommissioning costs when they arise at some uncertain future point in time. To our knowledge there are several corporate transactions on MPE's table awaiting approval, and the industry is looking forward to get some firm feedback from MPE regarding the new practice.

Our understanding to date of the signalled change of practice is:

  • MPE will routinely seek to impose such condition in all corporate transactions, whereby the seller or parent company of seller will be required to provide a guarantee covering the secondary liability;
  • It is unclear whether the secondary liability will be imposed only for transactions where the seller is the sole shareholder or if it also will be imposed in transactions where the seller is the controlling shareholder or a minority shareholder only;
  • Presumably the secondary liability under a guarantee will be designed so that it will be triggered upon default by the target company's obligation to cover its share of the costs related to decommissioning;
  • Both other licensees bound by a disposal decision and the Norwegian state will be beneficiaries under the guarantee;
  • The guarantee will be required to be governed by Norwegian law notwithstanding that the seller's parent company is a foreign entity and be without any monetary limitations;


Whilst the secondary liability for asset transactions is limited to the decommissioning costs after tax (i.e. 22% of the costs), it is currently unclear whether the Ministry of Finance (MoF) will change the Petroleum Tax Act to an after tax liability in corporate transactions as well, and thereby limit the liability to 22% of the costs. Unfortunately, sellers may have to live with a situation where the secondary liability is imposed, but where the tax effects and tax treatment is uncertain.

How will the new practice affect corporate transactions on the NCS?

The most apparent effect is that "clean exits" from the NCS seems to be history. This may affect pricing and will likely increase transaction costs for both sellers and buyers, but not dramatically. The new practice and the associated uncertainties could also be seen as an additional entry barrier for newcomers on the NCS and thereby to some extent limit the buyer universe.

The buyer and the seller will probably seek to mitigate the effects of the new practice by MPE. It is likely that the seller at least will require indemnity regulations in the transaction agreement or issuance of counter guarantees if the seller is comfortable with the counterparty risk, or if not, that appropriate decommissioning security arrangements will put in place similar to the one we currently see in asset transactions.